The world of investing is a scary place for students with less than $1,000 to their name. Most don’t know where to begin, and the idea of risking hard-earned money that took all summer to save can cause the sweats.
If you’re a student or recent graduate who wants to start investing, but you’re low on funds and high on nerves, try these tips for getting started stress-free.
Evaluate Your Debt Before Investing
Not all debts are created equal. Before you invest a penny, take a close look at your debts.
If you have credit card debt, your next step is a no-brainer: Pay it off before investing money elsewhere. Try these tips to help you pay off your credit card debt fast.
Student loans are less cut and dry, and whether to keep them or pay them off depends on your interest rate. According to the U.S. Department of Education, the average interest rate for undergraduate student loans is 5.05% for graduate student loans and 6.6% for professional student loans.
Historically, stock markets have returned an average of 7% to 10% per year. But stocks also come with volatility and risk, while paying off your student loan debt offers a guaranteed return. Whether to invest your extra money or pay off your student loans faster comes down to your personal interest rates, risk tolerance, and financial goals.
A good rule of thumb is to keep your loans under an interest rate of around 6%; any higher than that, and your priority should be paying off your debts. Better yet, if you’re still a student, look for ways to reduce or avoid student loans altogether.
Youth Is an Investing Superpower
With time on your side, you have an incredible advantage over your older counterparts. That advantage is called compounding.
Imagine you want to retire at 62 with $1 million. If your average annual return were 8%, here’s how much you’d need to invest every month to reach a $1 million nest egg, starting at different ages:
- Starting at Age 22 (40 Years of Compounding): $310.45 per month
- Starting at Age 32 (30 Years of Compounding): $709.95 per month
- Starting at Age 42 (20 Years of Compounding): $1,757.47 per month
- Starting at Age 52 (10 Years of Compounding): $5,551.72 per month
Your youth is a wealth-building superpower. Even someone earning minimum wage their entire life could become a millionaire if they invest every month for 40 years. But it takes a high salary to try to play catchup and save for retirement in only 10 to 20 years.
7 Ways to Start Investing as a Student With $1,000 or Less
As a student, you probably don’t have much money to invest. Don’t sweat it; you don’t need much to get started.
What you do need is dedication to the idea of building wealth. It takes consistency, patience, and faith that even though markets drop periodically, they will rise again with time.
1. Get a Head Start on Your Peers With a High Savings Rate
Most Americans are terrible at saving money. The average American only saves around 3% of their income, according to MarketWatch. Don’t expect to build wealth with a savings rate anywhere near that low.
Instead, start by creating a budget (we recommend using Personal Capital). It doesn’t need to be fancy or complicated; in the beginning, keep it as simple as possible. Map out your monthly expenses and your irregular expenses. As a student, your income may be irregular as well, with much of your income for the year generated during the summer months. Set aside some of that income for a small emergency fund and split the rest between expenses and investments.
Try these financial tips specifically for students, and at this stage in your life, don’t overcomplicate things. Spend less, save more, and resist the urge to show off to your peers through your car or drink-buying generosity.
2. Automate Your Savings
I’m a staunch believer in systematizing good behaviors like saving money and working out. The truth is that discipline will fail you sooner or later, so you want to rely less on discipline and willpower to do the right thing.
If your income is regular, you can set up automated money transfers to your savings account or brokerage account. Another option is asking your employer to split your direct deposit between your checking and savings account or brokerage account.
But your options don’t end there. There are a growing number of apps that help you save money automatically. For example, Acorns will round up your credit and debit card purchases to the nearest dollar and automatically transfer the difference to your brokerage account. You can easily create an IRA or Roth IRA through a broker like Ally Invest and set up automatic investments through them. Another option is Chime Bank, an online bank with similar automated savings services.
Regardless of how you do it, look for ways to automate your savings and investments so that building wealth doesn’t require active work from you every month.
3. Start Simple With Stocks
As a young person, stocks are a perfect place for you to start investing. Yes, they come with high volatility, which is one measure of risk. But over time, they offer strong returns, and since you won’t be retiring for many years, you can simply park your money and ride out the occasional stock market correction.
If you’ve never invested in the stock market before, it looks overwhelming from the outside. You hear analysts talking about PE ratios and dividend yields, concepts that may be a bit fuzzy for you. And there’s always someone pointing to some obscure technical indicator “proving” that the market is about to crash. Forget all that. Instead, follow these tips.
Don’t Try to Beat the Market
The first rule of stock investing for beginners is: Don’t try to pick stocks. Far too many novice investors — and experienced investors, for that matter — try to get clever and pick stocks that will “beat the market.” It’s a recipe for disaster for all but the savviest equity investors.
Instead, invest in an index fund. Index funds mimic different market indices, with no fancy stock picking involved. For example, you can invest in one fund that tracks the S&P 500 for U.S. large-cap stocks and another that tracks the Russell 2000 for U.S. small-cap stocks.
Index funds charge low maintenance fees, which is more important than most new investors realize. And statistically, they almost always outperform actively managed funds. After reviewing the data, U.S. News & World Report summarized that your odds of picking an actively managed fund that outperforms a passive index fund are roughly 1 in 20.
Practical Steps to Get Started
The first step is creating a brokerage account. I use Charles Schwab for their ease of use, low commission ($4.95 per trade), and access to commission-free funds. Another highly reputable option is Vanguard.
In less than five minutes, you can create an account, whether it’s a regular brokerage account or an IRA or Roth IRA. From there, you can transfer money to the account and start picking index funds to buy. I split my investments roughly 50/50, with half in U.S. funds and half in international funds. In each of those umbrella categories, I spread my money between small-, mid-, and large-cap funds.
But don’t let analysis paralysis stop you. If you’re feeling overwhelmed, start with a fund that only tracks the S&P 500. Next month, you can find another fund and diversify.
4. House Hack
As a first real estate investment, and a way to live for free, consider house hacking.
The traditional model for house hacking is buying a small multifamily property, moving into one of the units, and renting out the others. Your tenants’ rent covers the mortgage, and you get to live for free while building equity in an investment property.
Housing is the largest expense most of us incur, so if you can live for free, it frees up an enormous portion of your budget to go toward other investments. The trick, of course, is to make sure you actually save and invest that money, rather than spend it. (See Tip No. 2 about automating savings and not relying on discipline.)
If you’re wondering how you can afford to buy a property, one option is to have your parents help you. As partners in your first real estate investment, they can co-sign the mortgage to help you qualify. They may also help you with the down payment. For your part, you should volunteer to manage and maintain the property, from screening tenants and collecting rents to handling repairs.
As a final thought, remember that real estate ownership comes with sporadic but very real costs. Vacancies, repairs, and the occasional eviction will all rear their ugly heads periodically, so be sure to budget money every month for them.
5. Invest in Crowdfunding
If you’re not ready to buy a property for yourself but like the idea of investing in real estate, one option is crowdfunding websites. They provide loans for other real estate investors, and you provide funding for those loans.
Keep in mind that most crowdfunding websites only accept money from accredited investors, who typically must have a net worth of over $1 million or earn $250,000 or more per year. As a student with limited money, you are not one of these. But there are a handful of real estate crowdfunding websites that are open to everyone. Here are a few options available to you as a student just starting out:
- Fundrise. Since its inception, Fundrise has paid investors returns ranging from 8.7% to 12.4% between their various fund options. Anyone can invest with a minimum of $500 and choose between investments that are more income-oriented or growth-oriented.
- RealtyMogul. With several options for investment funds, RealtyMogul accepts investments starting at $1,000. For example, their MogulREIT 1 fund has returned 8% per year, paid out in monthly distributions, since its inception.
- Groundfloor. Offering a minimum investment of only $10, Groundfloor lets you dip your toe in the waters of crowdfunding with minimal exposure to see how you like it. They boast investment returns ranging from 5% to 25%, depending on the property grade and lock-in length of investment. Investors get to choose which types of properties they wish to invest in to balance risk and return.
6. Invest in Peer-to-Peer Lending
An alternative to real estate crowdfunding websites is peer-to-peer lending websites. The concept is similar, except the loans tend to be unsecured personal loans rather than real estate investment loans. Like Groundfloor above, in many cases, investors can choose the risk level of the loan, with higher returns offered for higher-risk borrowers.
7. Start a Side Hustle
No one says you have to invest in someone else’s projects. You can also invest in your own.
I invest in rental properties. My friend Zack hosts food and beverage tours. Another friend, Caitriona, tutors children. There are dozens of side hustle ideas you could try out; start with these side business ideas for college students.
One advantage of building a side hustle as a student is that it can grow and develop into a full-time business when your student days are behind you.
A Few Pitfalls to Avoid as a Young Investor
When I first graduated college, I fell in love with the idea of retiring young. I wanted to retire by 30. (Spoiler alert: It didn’t happen.)
My problem wasn’t the goal of early retirement; I still want to retire young. My problem was overconfidence and trying to invest “cleverly” to beat what I thought everyone else was doing. Instead, I should have followed these tips:
- Forget Being Clever. Focus on the fundamentals first: a high savings rate, diverse index funds, and perhaps a real estate investment by house hacking or crowdfunding.
- Don’t Buy Stocks or Funds on Margin. As you gain experience with stock investing, you can explore leverage, but for now, leave margin buying to the pros.
- Do Buy Your Index Funds in an IRA or Roth IRA. As a student with a presumably low income, Roth IRAs likely have more upside potential for you.
- Most of All, Avoid Debt. Credit card debt is particularly dangerous, but also be careful not to overleverage yourself if you buy real estate. That was my downfall; I borrowed too much money, too fast and too young, and my portfolio of rental properties collapsed in the 2008 housing crisis.
As a young person, you’re in a particularly strong position to get a head start on wealth building. While your friends are pumping every penny into things like flashy cars and going out every night, you can start creating stealth wealth for yourself.
Take advantage of compounding and time and let them do the heavy lifting for you. To leave you with one final demonstration of its power, consider this example: If you invest $550 per month for the next 10 years at an 8% return, then stopped investing entirely and just let the money grow over the next 30 years, you would end that 40-year span with roughly $1 million.
In other words, it only takes $66,000 of your own cash, invested over 10 years, to reach $1 million; simple compounding does the rest of the work for you if you can let the money sit for the next 30 years. When it comes to compounding, time really is money. So start young, and live long and prosper!
If you’re a young adult, have you started investing? If not, what’s stopping you?