When it comes to building up wealth, the best time to start is as soon as possible. Getting a job brings pay with it, and it’s a good idea to put some of that pay toward investing for the future. Many college students get jobs to help pay for college and living expenses. They should use some of their hard-earned money to start building wealth so that their money has a long time to grow. Here are some investment ideas for students.
Use a Discount Brokerage
Many times, financial advisors will steer investors toward proprietary mutual funds that benefit them as much or more than their clients. While these folks might be able to give some good advice, their track record of consistently beating the market as a whole is quite sporadic.
When thinking of how to invest as a college student, utilizing an online brokerage that charges low fees for purchasing stocks, bonds and funds is a good first step. Some brokerages offer trades from $4.95 and up, and they also provide quite a bit of data that can allow would-be investors to research the investments that they might want to buy. Every dollar that is not spent on management fees or transaction fees is a dollar that can go toward making money for the investor, not the advisor.
Look Into Funds
Diversification is key when it comes to investing. Most people have heard the admonishment to avoid putting all of one’s eggs in one basket. Investing in the market is one of the best examples of this old adage. If one invests in the stock of only one company, it is possible that every dollar would be lost if the company goes belly-up.
The fact that mutual funds and exchange-traded funds offer instant diversification is a major reason that they are some of the best investments for college students. Rather than purchasing stock from one company at a time, an investor can literally buy a portion of hundreds of companies with a single purchase. If one of these companies were to go bankrupt, it would likely have a negligible impact on the overall value of the portfolio. Some of the best funds to buy are index funds, as they will usually have management fees that are much lower than funds that attempt, usually unsuccessfully to beat the market.
Invest in Your Company’s 401k
Many college students will work at fast food or retail establishments. These companies are not generally looked at as great options for building up wealth outside of a few top management employees. However, many of them will offer 401k plans for employees.
The time to start saving in a 401k plan is today, especially if a person finds that they work with a company that offers a match. A common matching level is 50 percent of the first 6 percent of a person’s salary that gets invested. The reason why these accounts are good investments for college students is tied to the match. In the example above, if an employee earned $1,000 in a month and saved 6 percent, they would actually wind up saving $90, rather than $60, because the company would throw in a 50 percent match. It’s hard to get these returns any other way, year in and year out.
Another benefit of the 401k or similar plans for nonprofit or governmental employees is the tax advantage that they provide. The tax on these accounts can be deferred until the investor accesses the funds, generally around retirement. Every dollar of tax that’s legally avoided or deferred is another dollar that can go to work growing for the future.
Look Into Dividends
For those who want to invest in individual companies, looking for solid dividends can be a good place to start. Companies that have paid out stable or growing dividends for 10 years or more tend to be healthier than companies that do not pay dividends. There are exceptions. For example, Warren Buffett’s Berkshire Hathaway has paid exactly one dividend since he took over the company in the 1960s.
With that said, stable dividends require revenue and a positive cash flow and income. Companies that do not make profits on a regular basis cannot pay dividends to shareholders. Also, dividends can either go toward funding a person’s current standard of living if they are big enough, or they can get reinvested. College students should let the dividends reinvest so that they can build a growing wealth snowball over time.
College-aged students would do well to look into one or more of these tips to start building wealth through investing. The earlier that one starts investing, the less they have to actually invest to reach ultimate goals. Those who wait even five or 10 years will need to save more each month to build up the wealth that’s necessary to reach financial independence.