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Investing Tips for College Students?
GenKreton asks: "I am a rising junior in college and decided to take out loans to cover all my costs so I could graduate with money in the bank. My tuition bill is minimal as I have a nearly full ride, but living is always expensive. With that said, I feel like my thousands sitting in the bank could be doing work for me instead of collecting dust till the day I graduate. I have been researching how I could best invest my money so I have immediate access to it if needed, but still do better than a mere savings account. There seems to be a lot of mixed advice and some obvious scams out there. So I ask Slashdot, what is the best plan for a college student to do with his money?"
The *first* thing I would encourage you to do is live frugally. You don't need a car for many places in the country you would go to college. You don't need the latest and greatest computers or TVs or goodies and the more money you can save now, the more it will help you out. It was tough while I was an undergrad, but everything I could was saved and invested in some stocks which over time have paid off.
For most folks, I'd have to say mutual funds or real estate right now although the stock market usually performs at about 10% or better depending....
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Some of the online ones like ING Direct are paying close to 5% interest now, and if you got your loans when they were at super low rates, it might be a fairly safe and convenient way to make some money.
Try bankrate.com
Your best bets if you want no-risk are probably money market accounts and CDs.
CDs will give you a higher interest rate, but will not allow you to take the money out early without forfeiting some or all of the interest you've gained.
--The Rizz
"Money is just something to make bookkeeping convenient." --H.L. Hunt
Walk into your bank and invest in a mutual fund. It's easy and free to do, you will get plenty of advice, and there is someone managing your investment for you. Best of all, you can pick a mutual fund that is more aggressive or steady depending on your willingless to possibly lose some to gain more.
And to boot, you can withdraw your investment at any time. Usually takes 1-2 business days to take effect.
For he today that sheds his blood with me shall be my brother.
I would recommend opening a Money Market account along with a Checking account at your local bank, or even better, an online bank such as NetBank. An online bank offers the flexibility of moving around (as you'll probably be doing quite a bit of this in the next 5+ years), and as they don't have the overhead of maintaining branch locations, they usually can pass those savings along in higher interest rates. This way, your money can earn around 4% in the Money Market, but still be a liquid asset that you have full access to at any time.
Best of luck!
Although be careful - the financial professional's first obligation is to enrich himself, otherwise he is self-selecting to not be a finance professional.
I recommend getting an online brokerage account, and investing in an index ETF (many boring technical reasons for this). The one I like most is SPY (the spyder fund), which tracks the SP500. Once you have invested whatever you want, ignore the money. It will go up, it will go down - but over 20-30 years it is a very safe investment.
For every $1 invested:
after 10 years, you have $2.60
after 20 years, you have $6.70
after 40 years, you have $45
after 55 years, you have $190
So assuming that you are 20 and retiring at 75, every dollar you invest now is about $200 at retirement (or, seen another way it is $20 per year at retirement). Invest early! (And ignore what people say about the markets - it is a proven fact that you cannot make money listening to others, except for insider trading...)
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No. The stock market performs around 10% on a rolling average of several decades...In the short term your returns can be anything from 300% to losing all of your money. Even a diversified fund in low risks stocks can lose you money rather quickly. For example a close friend currently has several hundred thousand dollars in a spread fund and last month was upto 22% return but this month is all the way down to 6% return on his rolling average. This is not the sort of worry a uni student really needs...Secure low risk returns are always good and I do agree with you about real estate - well chosen investments there always return good rewards.
I ate your fish.
Here's a better plan...
Figure out your monthly nut (living expenses, ie. food, rent, medicine) and then set yourself up a salary from your cash. Invest in something liquid and safer... A large portion cash (ie. Money Market,) maybe as much as 33%; some in a stock index mutual fund, maybe a third, and the other third in high-quality bonds. This is a fairly conservative investment strategy, and you probably won't be a millionaire at graduation, but you'll spend less of your original capital by having steady income streams from your conservative investments, and some protection against inflation from your stock-based mutual fund.
The bottom line is you might be able to get ahead by buying stocks and taking loans out for school... But US Dept. of Ed. loans have gone up drastically in the last couple years--into the 6% range. This means you'd have to have a pretty good year on your stocks--every single year you're in school--or you'd end up paying more in student loan interest than you would earn from your stock investments, especially after you adjust for inflation... That 10% avergage on Large-Cap stocks over time is fine, but after inflation is factored in your margin gets pretty thin before you're upside down.
Who did what now?
Yes I read the post, and he is investing the loan.
Follow me here.
Say I earn $1,000 dollars a month and that I also spend $1,000 a month. If someone gives me $1,000 dollars and a month I subsequently spend $1,000 on non-living expenses then which $1,000 dollars did I spend; the $1,000 I earn or the $1,000 given to me. Get my point? The correct answer is the $1,000 dollars given to me. It doesnt which $1,000 dollars I purport to have spent nor does it matter which physical bills I used. The fact or the matter is that if I had not been given the $1,000 I wouldnt have been able to spend $1,000 dollars on non-living expenses.
It won't be as easy or cheap to do later in life, especially the second part.
Savings accounts are well known as a waste.
Mutual funds do considerably worse than even stock indexes.
Treasury bills? Again, not enough of an ROI to make tying up the money worthwhile.
Paying back the loan is a good idea, but it's a better idea to try to make the loan work for the borrower.
(research modern banking practices and you'll see that what the article writer wants to do is common in commercial banking, fairly uncommon with the public sector.)
Ethics: It's money that was given to achieve an end, to hamstring yourself by not trying to do something worthwhile with the money in order to facilitate paying it back, is a waste. It shows well on the article writer that they are wanting to do that. Anything less is lazy.
Finally, this is the lowest interest rate loan you'll likely ever find, a mortgage notwithstanding. It is smart to try to start generating income with it.
Great question to be asking in your situation.
BOOKS. The previous poster mentioned Dave Ramsey. His "Total Money Makeove" is a great book for anyone -- especially someone in college and soon to be graduating. He talks about not living beyond your means and also basic (and too-often ignored) good money practices such as an emergency fund. Much of the advice is geared more towards people working and buying or paying for a home, but it would be a valuable read nonetheless.
STOCKS. I would be leary of stocks to achieve the purpose you are looking for. Sure, 10% growth a year is attainable, but such growth is usually attained over the *long term*. Sure, there are some successful day traders and professional investors who achieve that regularly with their own money (and plenty more who fail), but that comes with a lot of knowledge, practice, and experience (some would say luck, but if you don't have the first three, you might as well invest all your money in lotto tickets). Since you said you are a college student, I doubt you have the time to be doing this -- and it would take awhile just to learn. Beyond that, they are not very liquid. Sure, you can cash out, but if you happen to need the money when the market is down, you can kiss a lot of it goodbye.
MUTUAL FUNDS, ETC. As for mutual funds and the like, a better return might be possible, but you indicated you need the money kept liquid -- that is, you need easy access to it. I don't think you will find this liquidity in most mutual funds. Same with CDs and T-bills. You could see a 5-6% rate on a T-bill (with the bonus of the interest not being taxable at the state level), but you have to be okay with not touching the money for 6 months.
SAVINGS. I am curious interest rate you were currectly getting for the savings account. Most banks seem to be paying 1-2% -- hardly keeping up with inflation. However, there are others -- emigrantdirect.com is what I use -- that pay a respectable 4.5% or higher. I mentioned emigrantdirect.com (note: I am not affiliated in any way with them, and receive nothing for recommending or mentioning them): they have no minimum balance requirement, are currently paying 5% interest (scheduled to increase to 5.15%, I believe, on 7/28), and is easily accessible -- that is, if you have a tuition bill coming up in 3 days, you can get the money out in time. If you are only getting 1-2%, a 5% return might be a good solution to your problem -- especially since the money would remain liquid.
FINANCIAL CONSULTANTS. Another post recommended talking to a financial consultant. While I would not discourage you from doing so, keep in mind that with most advice, you tend to get what you pay for. IANAL, but I believe in many states (it is the case where I live), any idiot and his brother can become a "financial consultant" with minimal and/or no training. Example: a guy I knew, fresh out of college, in debt up to his ears, with no financial experience at all, became a "financial consultant" through some company as a way to try to make some extra money -- and the funny thing was, most of the "advice" he spewed could be found in any newspaper financial section or cable financial programs.
There *is* good advice out there, but you'll have to pay for it. Depending on how much money you are taking about, it might be worth it. If possible, check into the financial background of your consultant first; if he or she is personally living paycheck to paycheck, has two mortgages on the house, etc., it might not be the best person to ask. If, however, the person has been doing it for 20 years, owns her house, bought her last car with cash, and does this work more as a hobby because she likes helping other people, it might be advice worth listening to (and paying for).
IN GENERAL, you are asking a great question. It's hard to give generic financial advice because every situation is different, but hopefully this and other posts will give you some ideas. Good luck!
Chris
Have you seen ING's savings accounts?
http://home.ingdirect.com/products/products.asp
If nothing else, it keeps you up with inflation.
A money market's rate of increase can go down with the stock market, but you won't lose your principal. Basically it protects you from inflation.
The interest on the standard savings account at ING is quite high -- currently 4.35%. It's gone up steadly from 3% APY when I signed up in April 2005. Its simple to put money in or pull money out. The savings account is "linked" to your checking account (at your favorite bank - ING doesn't offer checking) which allows you to deposit or withdrawl easily. They also offer a 12 month 5.25% CD. Both the CD and the savings account are FDIC insured.
ING Direct (non-affil)
I'm not experienced like the grand poster in investing, but last year I opened up an account with ING for savings. I figured that as a college student, I needed to start saving enough money to make sure I'd be mobile when I graduated, without going into debt.
The current Annual Percentage Yield is 4.35%. Right now I have about $3,000 in my account, and my monthly interest earned so far is $9.01. Putting money in or pulling it out of your bank account is very easy; it takes a couple of days for the transaction to go through, and there's no low limit you need to be concerned about. They also have a very handy feature that will deposit an amount from my bank account on a cycling time period, so right now I have it automatically set to take a certain percentage off the top of my paycheck (which comes biweekly), so I won't be as tempted to spend it.
I think they also have a pretty rewarding referral program, but I'm bad with those. I just feel awkward trying to advertise things to people.
I wanted to add some confirmation and some slight different suggestions to this excellent set of advice.
.com bubble bursting, and there have been some sell-offs on massive volume this summer. There's certainly some room for it to keep going, but I'd hesitate to recommend that as a passive investment vehicle at the moment--there are a lot of signs the best part of the move is now history. You don't want to be one of those people who buys into the stock market just as it hits its peak, only to watch your money get chipped away for years by a bear market.
I've also dealt with ING Direct for a number years (and in real US dollars even!) and they were the first thing that came to my mind as well for the situation asked about here. You can move money in and out of the account as fast as your bank will clear the transactions, making it fine for use as backup cash, and the interest rates soundly thrash most other savings vehicles.
Comments about clearing debt and such before investing are spot on, but I think the timeline outlined here is a little conversative. It's not that hard to extract money from the stock market when it's in a liquid stock like SPY, where you don't lose much in the buy/sell spread to enter and exit the transaction. If you needed emergency money, you can get it out of a good brokerage account in a few days by closing your position and wiring/ACH'ing the proceeds out. As such, waiting until you have lots of money on top of a large safety net may not be necessary for those willing to tolerate some additional risk. If your debts are paid off, you have a full term worth of cash, and another $3K on top of that, putting that $3K into a relatively safe stock market investment instead of a savings account would be aggressive, but not crazy. Stashing 2-4 terms worth of money probably makes sense to a really long-term student like our poster here, students doing a shorter tour of duty will have graduated before they meet that standard.
That said, I'm a little torn on the subject of investing in ETFs like SPY right now though. If this were early 2003, where the stock market was fairly priced by historical standards, then I'd say jump on that. But the current S&P is showing a lot of the signs of a peaked market right now; it's been going straight up for over three years, it's already recaptured most of the lost ground from the
It's also worth noting that while Graham's "Intelligent Investor" is a great book, it's hard to follow some of its principles while trading ETFs. Compared to the relatively easy way you can characterize the intrinsic value of a regular stock, it's not as clear what the intrinsic value of a an ETF like SPY is.
The loan money is going to the school. My money that I earn is being invested. Internships can pay.
Buy stock, buy bonds, even buy gold, but don't buy realestate. Real estate only makes sense when you know the population will increase, and demand will increase. What if population decreases?
Since we do not yet know if population will increase or decrease, realestate is a very temporary investment which might make money this year, but be worthless if say avian flu hits, or if there are natural disasters. It's better to profit from the natural disasters, avian flu, and everything related to it. This makes more sense than investing in homes when people cannot find clean food, water, and are hiding from bird flu and killer storms.
I'd suggest you invest in bottled water. I suggest you invest in food. If I thought the world could last long enough I'd tell you to invest in bottled air, and wait for the clean air to run out, but thats for our children to invest in. The point is, houses only matter if theres clean food, clean water, a disease free environment, etc. In a world where natural disasters are increasing, where terrorism is a threat, and where clean water and food is running out, it makes the most sense to invest in the companies you know for sure will profit in the rebuilding efforts, the companies which will create the drugs, the companies which sell bottled water, the companies which sell clean food, and especially the farmers. It makes sense to invest in gold in case there is an economic collapse of some sort. It makes sense to invest in silver, it makes sense to invest in corn because it's the most popular crop in America and it's only a matter of time before it becomes more popular. It makes sense to invest in surveillance because how are we going to track the terrorists? It makes sense to invest in emotions.
Which emotions are people going to feel after a natural disaster? Some will feel sad or upset, some will feel hate, some will feel one way or another, but when profiting and investing, it's all about predicting how people will feel, and investing accordingly. Investing is a science, of psychology. It's neuro-economics. Our economy is not rational, it works on emotions, it's irrational, it's hate, love, fear and other emotions, but thats the secret. You know what to invest in based on what the majority of people are feeling, and you know what to invest in based on what the majority of people with money are feeling. Most people who have a lot of money, what are they feeling? Figure it out and invest.
I'm picturing the guy has $5,000 to $10,000 in the bank. It's good to have a couple thousand in a savings account in case something happens, but beyond that, there needs to be a plan. It's also good to have some money to live off during those anxious few months right after graduation.
Student loans don't collect interest until 6 months after graduation, normally, and the interest rates are generally merciful. Plus, he'll most likely have a big income boost soon after graduation -- that's part of the point of getting the degree. It's usually best to take the full amount offered each quarter, live comfortably but reasonably, and pay all bills on time and in full each month. Good credit is crucial.
All the securities markets in the U.S. are doing weird things right now, so even diversified investments are a risk. Since graduation is a known amount of time away, and the money won't be needed until then, I recommend a Certificate of Deposit. That gets the risk-free rate, guaranteed. Day trading is almost always a terrible idea.
I don't know the details of the law you mentioned, but somewhere in the menagerie comprising savings accounts, money markets, IRAs, trusts, CDs, bonds, mutual funds, commodities, stocks, and so on, I'd imagine there's someplace you can put your leftover student loans other than your mattress.
And yes, millionaires do borrow, they just don't borrow to finance something with diminishing value (like a vacation). It takes money to make money.
Or even CitiBank's (www.citi.com)e-savings account. You can open it online, so no worry about having one nearby.
The 5% rate should be as good as any CD you could get, and since it is a savings account, you can access your money anytime. Also, depending on the rate the student loan is at, you could be making more money than you are losing in interest.
So, first thing is to pay off credit-card debts. You don't get a deduction on the interest and it's hard to beat a sure 9%-21% return on your money. If you take care of your credit score, then you will be able to borrow the money back later when you need it.
Second, recognize that an investment's risk is proportional to its expected return. You can make just a little bit in a savings account (check out ING direct, which is paying around 5% right now), with no risk to your principal. Or, you may make a lot by speculating in stock options, but you stand an enormous risk that you'll lose everything. You can solve mucch of the risk problem by diversifying, but you cannot completely cure it. It's hard to diversify without a lot to invest.
Third, look at your time-horizon: how soon do you need the money? Over the long-haul, the stock market will out-perform "safer" investments. A broad-based stock mutual fund with minimal expenses will allow you to at least track the market. The Vanguard S&P 500 index is very low-cost and tracks the S&P 500.
Ignore advice about whether the market is in a "Bubble" or not -- if there was a general consensus that it was true, it would cease to be true because everybody would sell.
Fourth, DON'T, whatever you do, DON'T buy an insurance product like whole-term life insurance, universal life insurance or annuities. Insurance sales people take massive commissions straight out of your payments. And insurance companies, by law, are very limited in what they can invest in. As a result, you throw away a big chunk of money and then don't get a great return. If you need life insurance, buy a level term life policy from a financially sound company and invest the remainder. Doing that will give you the same insurance benefits, but a better return.
If you have the money I would say pay the tuition. Less debt you have the better off you are.
Check out Dave Ramsey www.daveramsey.com he has some great ideas about debt and never having them again. My wife and I started the plan this year and it is a great feeling to be paying down debt and getting rid of payments. Its amazing how much we are paying in interest that would could be using for something else.
His plan is pretty simple. Get on a written budget and STICK TO IT. You have X dollars comming in budget them ALL and dictiate where it goes. Use all cash! We put money in envelopes and when the cash is gone we are done with that catagory for the month. This usually takes up to 3 months to figure out what you are doing and to get it right.
Cut up the credit cards!
Save 1000 dollars in the bank for an emergency fund.
Start listing all your debts smallest to largest and pay off the smallest ones 1st. This helps with a mental good feeling of getting rid of payments. It worked for us! We feel great when we pay off another one. The car should be payed off in 2 months.
Don't go out to eat, don't go on vacations till you get the debt taken care of.
Once you are out of debt then you start saving for a house, retirement, etc. Check out his website he lists it all. We are very happy and hope to be out of debt within about 2 to 2.5 years INCLUDING all the stupid stuid loans... Then off to save for a house...
Your entire first sentence is a blatant oxymoron. Let me get this straight, you borrowed massive amounts of money, thousands of dollars, to cover "all your costs" [which you state are minimal,] to graduate with money in the bank? First off, if you have minimal expenses for college, you should be taking advantage of that by investing the money you earn, not the money you borrowed [which as a previous poster stated, is illegal]. Second, I understand living is an expense, but get a job like a responsible person and pay your way. Third, if you don't need to touch your money for three or four years, it may be smart to use a minimal cost savings account through someone like ING Direct. They don't have physical banks or tellers, so they save $ and pass it on to you in the form of higher interest rates for your savings. Ex: Average savings account interest yield today .25%, ING's is 4.35%. That's insanely better.
Here's a plan, may or may not work for you but its working for me. I didn't take a single loan out for college. I had one meager merit scholarship, and I worked part time during nites and weekends, and full time over summer and winter breaks. I paid my way through college with the miniscule help of my parents, and I graduated in four years. I now have a substantial salary at a significant software company, and I still live at home. While some of my friends are blowing their new influx of cash on their own new apartment and new car, mocking me for choosing to stay at home for 3 more years, I will be buying a house while they pay rent on something that holds no equity.While other friends are forced to live at home to pay off 30k-40k (sometimes higher)in student loans, I have managed to put 20K in the bank in 12 months, while still living comfortably with plenty of spending money in my pocket each week. Not to mention the fact that I'm not spending a single dime on my Master's degree, which I am getting part time. Now picture just turning 25 years old, with 60k in the bank (to be used as a down payment on a beautiful new home), 3 yrs full-time experience in my field, a fantastic rewarding job at a major company, and a Masters in Computer Science. Not to mention all that was done without a single ounce of debt to my name (or my parents). I think you will see better plans involve NOT borrowing money.
Check out Primerica they do a free Financial Needs Analysis (FNA) for you and will come back with a long term (retirement) as well as short term (what to do with what's in your bank) assessment. They also base the recomendations on things like - when you want to get married, own a house, retire etc. It's tailored to you not to some actuary table.
Things to note:
I agree, pick a school that will teach you not just how to do 'X' but how to adapt, learn, and develop a methodology that makes you capable of doing just about anything. Anyone with a textbook (or hell a good tutorial website) and some opensource software can learn to program. It takes a quailty environment and good teachers to show you how to actually think. Now that being said, no matter where you go the onus is on YOU to learn. You could very well get the same from an education that costs half as much as the A+ #1 college, but you have to work hard and actively pursue your education [everywhere]. So don't just sit there and learn by osmosis, learn some critical thinking and problem solving skills and you'll be set to do anything in your field of choice.
;)
And as for the actual topic of college financial advice: Put all your extra cash in an ING account: no minimums, nearly the highest yield for savings accounts (see HSBC or Emigrant Direct for the usual highest 2), quick access to your money, easy online interface and secure + FDIC insured. The real bonus of using ING though is the high yield no-minimum CD (Certificate of Deposit) accounts. For a college kid you want safety, access, and a reasonable return. Break your money into 20% chunks, one of them keep in the regular savings. The other four gradually invest in 12 month CDs (ING is about 5.25% APY right now), a new one every 3 months set to auto-renew to a 12 month CD, auto-reinvest the interest earned. This is called a CD ladder. Now every 3 months you have penalty free access to part of your inital egg plus interest, and if you ever need all the money it's only a 3 month interest penatly, which lets face it, for emergency use isn't a big hit, especially if the one you cash out has been around for more than 3 months already.
And live like a cheap slob, now's the time you can get away with it and save some cash that way as well.
-- I'm not a pessimist, I'm a realist. It's not my fault that life sucks so much. --
Before everyone goes crazy about how stupid it is not to invest this money, just hold up a second.
Depending on the terms of your promissory note, it might be illegal (i.e., breach of contract in the best case, actually breaking the law in the worst case). For my student loans, I was careful to read over the promissory note carefully and discovered that, under its terms, pretty much anything I needed was considered an "incidental educational expense". For my federal loans, however, they were very strictly limited to only contributing toward tuition and some immediate expenses like textbooks. Whether you worry about ethics is really your own business, but you should definitely be certain that what you're doing does not constitute a breach of the contract you signed in order to accept that loan. Most loans will automatically be considered defaulted if you do that.
That being said, the CD or T-bill ideas are all good ones. Do NOT invest that money anywhere where there's not a guaranteed return. You don't need super-huge returns here; you just need enough of a return to cover the interest being charged on the loans.
I've always been jealous of the way the banks and credit card companies lend out so much money at high interest.
Now, there are micro-lending options for consumers - this business is still in its infancy, but its worth a look:
http://www.prosper.com/ (U.S.A. only)
http://www.zopa.com/ (U.K. only atm i think)
I personally have over a hundred loans out to various borrowers, and even if many (%20+) of them default, I'm still beating the return I'd get from a money market account. They are legitimate, unsecured loans, and adversely affect borrowers credit ratings if they are delinquent.
They've been in the news a lot recently too: http://news.google.com/news?q=prosper.com
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