- You can start saving and investing even if you don’t have a lot of money or financial knowledge
- There are easy, low-risk ways to invest small amounts of money
- Make a budget to figure out how much you can afford to put into a savings or investment account
Saving for your future is probably one of the last things on your mind when you’re focused on exams, student loans, and other immediate concerns. But the earlier you start putting money into an investment account, the less you’ll have to worry about money as you get older.
This isn’t just about saving for retirement—though that is an important part of it. Investing will help you reach other goals you have for your life too, whether it’s buying a home, starting a business, having children, traveling the world, or whatever else you decide to do.
The good news is your generation is off to a pretty good start: A 2017 study led by the Center for Generational Kinetics found that 12 percent of Generation Z is already saving for retirement and about 35 percent plan to start saving sometime in their 20s.
“Life is expensive,” says Jonathan F., a fifth-year undergraduate at the University of Waterloo in Ontario, Canada. “I think we should all be saving toward retirement as soon as we start working, if not earlier.”
What students say about investing
Almost 90 percent of students surveyed by Student Health 101 said investing is somewhat or very important to them, but more than 25 percent said they don’t currently have any savings or investment accounts, and more than 45 percent admitted they were not confident in their ability to successfully manage and invest their money.
Students gave a variety of reasons for putting off investing, including:
How you can start investing without a lot of cash
These concerns are valid, but you don’t want them to prevent you from getting started. Even if you have to start small (as most of us do), that initial investment will multiply over time. The earlier you invest, the more time your money has to multiply.
Having more time to earn is the biggest advantage of investing early, according to Heather McElrath, director of communications at the Jump$tart Coalition, a nonprofit that promotes “financial smarts for students.”
“Start small,” McElrath says. “Try just $1 a week or $5 a week—it all adds up.”
If you set aside just $5 per month during college, you would accumulate $240 in savings over four years. If you managed to set aside $20 per month, you’d have $960. That may not be a fortune, but it is a good starting point. Plus, if you put that money in a savings account with a high compound interest rate (which we’ll explain more about below), your savings will start to grow on their own.
“[Invest] while you are young! Don’t put it off!” says Laura R.*, a first-year graduate student at University of Wisconsin in Menomonie.
The FDIC is a government agency that insures certain bank accounts up to $250,000. If your account is FDIC-insured, then even if the bank goes out of business, you’ll be able to get your money back.
The interest rate on your savings or investment account is the amount that the bank pays you for letting them hold your money. Standard savings accounts currently offer very low interest rates, but there are other types of accounts (such as online savings accounts or CDs) that pay higher interest without requiring you to take any added risks.
If you invest $100 and your interest rate is 2 percent per year, you’ll have $102 at the end of the year. But if your interest is compounded more often, you’ll make money faster. For example, if interest is compounded monthly, you’ll make 1/12 of 2 percent every month. The first month, you’ll make about 17 cents. Then you have $100.17 in your account. The next month, your interest is calculated based on that amount, not the original $100. It may seem small at first, but once you have a decent amount of money saved, compounding makes your money multiply much faster. You should always check how often your interest compounds.
Index funds are an investment that balances the risk of investing in stocks by investing in many companies at once. Common indexes include those based on the S&P 500 (a group of 500 large, stable U.S. companies), the Dow Jones Industrial Average (30 very large companies), and the NASDAQ (a technology-focused group of more than 3,000 companies).
A Certificate of Deposit is like a loan that you give your bank. You make a commitment that you will keep your money in the account for a specific period of time (typically one or more years). In return, you earn higher interest than you would if you kept the money in a traditional savings account.
Figure out how much you can afford to invest
Before you can start investing, you need to figure out your budget. Add up all the expenses you know you have each month: any bills you pay, groceries, gas or other transportation costs, plus what you spend on going out with friends and other recreational activities.
Let’s say you have a part-time job and make $800 per month. After one year, you’ll have made $9,600. If you need $600 per month for your expenses, that’s $7,200 per year. If you set aside three months’ expenses for an emergency fund, that’s another $1,800. Subtract these expenses from your income, and by the end of the year you’ll have up to $600 that you can safely put aside in a savings or investment account.
Even if it feels like you have no money available to invest, most college students can find a way to cut spending or make a little extra income.
The best investments to make during college or your early career
We’ve all heard about how “easy” it is to make millions buying Bitcoin or flipping houses. These “investments” might sound exciting and make for interesting TV shows or YouTube videos, but they’re extremely risky. Remember, the point of investing isn’t to get rich quick—it’s to build a reliable and secure financial foundation for your future. That’s what makes investment different from gambling. Here are three smart ways to start securely investing your money during college.
Pros: Higher interest rates, convenient online transactions
Cons: No ATMs, may have limits on transfers
Opening an online savings account enables you to earn higher interest rates compared to a conventional bank account. It may sound risky to put your money “online,” but there are many legitimate online banking options where your deposits have the same FDIC insurance as brick-and-mortar banks.
“You might need to maintain a minimum balance, [but] many banks offer no-fee savings accounts, and some even have specific accounts for students,” says John Pelletier, director of the Center for Financial Literacy at Champlain College.
More and more of our banking takes place online anyway. No matter which bank, credit card, or payment app you use, the ability to check your balance or transfer funds online is an important feature.
“The banking apps available today are amazing,” says Pelletier. “You can receive alerts when your account balance goes below a certain level or when there is suspected fraud involving your account.”
Remember, if your cash is sitting in a desk drawer or even in a regular checking account, it won’t grow at all. Of course, you need to do your homework before putting money into an account.
Some factors to consider when opening a new account:
- Is there a minimum initial deposit or balance you must maintain?
- Is the interest rate only an introductory rate that will drop later?
- How often is interest compounded? (More often means more money for you.)
- Are there convenient ways to deposit, transfer, or otherwise access and use your money?
Pros: Safer and more predictable than investing in stocks, profit is guaranteed
Cons: Lower return on investment, your money is “locked up” for a year or more
CDs are very safe and predictable, which makes them a good first step for younger investors. If you already have a savings account set up, you should start by checking what CD options are available from your bank. With a CD, you earn a fixed interest rate from your investment and receive the money at a specific date. However, you won’t be able to withdraw or use that money for that period of time (typically at least one year), and the average returns are far below what you can make investing in higher risk/higher return options, like stocks.
It’s not the most profitable option, but it’s a safe way to invest a limited amount of money for a defined period of time. This feature can make CDs a good option for students and recent graduates who are just starting to build their portfolio and aren’t ready to commit to longer-term investments.
Pros: Tax-free investment growth, flexible investment options
Cons: Long-term commitment, penalties for early withdrawal
Setting up a retirement account has a big impact on your ability to retire securely. The 2019 Retirement Confidence Survey by the Employee Benefits Research Institute found that 76 percent of workers with an individual retirement account (IRA) or comparable plan were confident they would have enough money to live comfortably in retirement. Only 39 percent of those without an IRA said the same.
Both Roth IRAs and traditional IRAs offer tax advantages that help you earn more money. The advantage of investing in a Roth IRA is that you don’t have to pay taxes on the profits from your investments.
“A lot of people know about traditional IRAs, [which] are nice for adults because your money goes in pre-tax and that’s great if you have a high income,” says Geoff Sanzenbacher, assistant director of research at the Boston College Center for Retirement Research. “Most college students don’t have a high income, [so] young people especially should know about the benefits of the Roth IRA.”
One critical thing you need to understand about your Roth IRA is that it’s only an account. After you set it up, you still need to decide on specific investments (e.g., stocks) to put inside the account. Index funds that track a broad range of companies are an excellent choice for long-term investing, because these funds tend to have low costs and solid returns, and they’re less risky than buying individual stocks yourself.
“What really matters is the after-fee return,” says Sanzenbacher. “Roth IRAs do typically have more fancy investment options too, but index funds tend to have a good return because the fees are so low.”
Keep learning and take action
As you start opening accounts and making investments, you’ll end up dealing with several different types of financial professionals. It’s important to realize that only fiduciary advisors have a legal duty to act in your best interest. If you ask a stockbroker which stocks to buy, but they don’t have a fiduciary responsibility, they can recommend investments based on other factors—like the commission they’ll earn from the sale.
Your school may also provide resources related to financial education and planning. For example, the University of Massachusetts offers a student-led program called Smart About Money, which includes one-on-one financial coaching and educational events based on game shows like The Price Is Right and Cash Cab.
Learning the basics of saving and investing is important, but you still need to take action. “What’s different about financial literacy from other subjects you learn in school is that it’s not just about knowledge—it’s also about behavior,” says Pelletier. “If you can score 100 percent on a financial literacy test but you don’t change your behavior, you don’t get the benefits.”
“Saving is like exercising or going to the gym to build muscle,” he says. “It’s not always the most pleasant thing to do, but most of us can save something [and] it helps build the habit.”
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Heather McElrath, director of communications, Jump$tart Coalition, Washington, D.C.
John Pelletier, director, Center for Financial Literacy, Champlain College, Burlington, Vermont.
Geoff Sanzenbacher, assistant director of research, Center for Retirement Research, Boston College, Massachusetts.
Employee Benefit Research Institute. (n.d.). 2019 retirement confidence survey fact sheet #1. Retrieved from https://www.ebri.org/docs/default-source/rcs/2019-rcs/rcs_19-fs-1_confid.pdf?sfvrsn=c6553f2f_4
Pritchard, J. (November 28, 2018). CDs are among the safest investments for your IRA. Retrieved from https://www.thebalance.com/basics-of-the-cd-ira-315235
Schiavone, J., & Lynch, J. (April 12, 2017). Less than half of non-retired Americans confident they’ll reach financial goals by retirement: AICPA survey. Retrieved from https://www.aicpa.org/press/pressreleases/2017/less-than-half-of-non-retired-americans-confident-theyll-reach-financial-goals-by-retirement-aicpa-survey.html
University of Massachusetts Amherst. (April 29, 2019). Shaking the money tree. Retrieved from https://www.umass.edu/smart-about-money/
US Trust. (n.d.). 2018 US Trust insights on wealth and worth detailed findings. Retrieved from https://ustrustaem.fs.ml.com/content/dam/ust/articles/pdf/insights-on-wealth-and-worth-2018/Detailed_Findings.pdf
Villa, D., & Dorsey, J. (n.d.). The state of Gen Z 2017 national research study. Retrieved from https://genhq.com/gen-z-2017-research-white-paper/
Student Health 101 survey, June 2019.