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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?"
Don't ask slashdot. Or any other IT geeks.
Go ask a financial professional. There are tons that give free first time consultations.
Why pay intrest when you dont have to and realize that you do not neet to buy all the toys now.
Undetectable Steganography? Yep, there's an app fo
You don't provide enough information about the kind of loans you have taken out. Do you really need to have "thousands in the bank" to live? Perhaps you could try to reduce your cost of living instead.
The biggest issue in my mind is that by taking out loans, you now owe interest. Depending on what kind of loans they are, the interest rates, and the repayment schedules, this may not be the best thing to do. In the long term, unless you're able to achieve a higher rate of return on any investment you find, you'll be losing money.
If you financial situation is stable, and you have some sort of fallback plan (i.e. family), or you can look forward to finding a good job when you graduate, the best thing to do may be to just pay off those loans right now.
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You borrowed money to invest. Think about that for a minute.
Then you borrowed money to invest and you don't even know how to invest. Think about that for another minute.
Give the money back to the bank, pay your stupid tax, and go to DaveRamsey.com and get My Total Money Makeover and learn how to use money.
Or, continue to be financially brainless and wander around borrowing money for no good reason and wonder why you retire broke and bitch about Social Insecurity.
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One concept I've heard of that I liked combines liquidity (access to money) with a high return. Say you've got $5000 you can put away. Divide it by five and put $1000 each into a 1-, 2-, 3-, 4- and 5-year Certificate of Deposit (CD). At the end of the first year, when the first CD matures, roll that into a 5-year CD. (The longer the time, the higher the interest rate is you earn, usually). Lather, rinse, repeat. Every year, 20% of your investment becomes available without penalty and you're earning a high rate of return on your money due to the longer term and interest rate averaging over the time period.
That, or find a financial advisor you can trust. A good one will value your relationship and look forward to making you money for many years. A bad one will want you to trade stuff in your account often (earning them high commissions) and leaving you in the poorhouse.
That, or invest in mutual funds that cover a lot of type of investments: some index funds, some international/European funds, a few bonds here and there. It's very easy to avoid scams and beat your savings account rate. Optimizing that is what is a bit trickier.
Small potatoes make the steak look bigger.
I've been a university student for ~11 years (bachelor's, master's, and finishing up my PhD). As university students, we tend to have little income and fairly regular (tuition) payments. (Although, scholarships and occasional co-op work terms/internships can produce "spikes" of surplus cash, and the question then becomes how to manage this influx optimally.)
Here's some brief advice based on my own experiences... I don't have the willpower to go into lengthy explanations for each point, so the first thing that I can recommend is that you start by doing some background reading. (Also, I'm skipping all of the mundane advice like "live frugally" because you've probably heard most of it before, and you want a non-bullshit answer.)
0) Pick up the "Intelligent Investor" by Graham, revised edition with commentary by Zweig. Then, read everything at: http://www.bylo.org./ When done, read everything at: http://www.ndir.com./ Once you have established this basis, you will probably understand & agree with my following comments more closely.
1) Pay off your debts first. Do not invest money while you still have debt -- paying off a 19.75% credit card balance will reap you more money than any average investment. Let me repeat that, because most people are retards and don't get this point. Do not put a cent of money into a mutual fund or stock until your debt level equals $0.00. Capiche?
2) Open an ING Direct savings account. It's free, it pays high interest, and it's secure. (I've been a customer with the Canadian version of ING Direct for more than 7 years.) Keep your spare cash there. This includes any money that you make on co-op work terms (or summer jobs, etc.).
3) Build up a sufficient supply of cash in your ING account -- enough to pay for the next 2-4 terms (or whatever you feel comfortable with). This is your "margin of safety" cash -- don't touch it. It's used in the event that you lose your job, crash your car, etc.
4) At this point, you have no debt, and you have reached your "margin of safety" amount. Once you have built up an additional $3k to $5k on top of your margin of safety, open up a discount brokerage account (e.g., E-Trade).
5) Now, start to build a "couch potato portfolio". Buy an S&P500 ETF (called a "SPY"der, in the States) from iUnits/iShares. (I recommend waiting until you have $3k to $5k to minimize the effect of brokerage commissions, as a percentage of the amount invested.)
6) Every subsequent $3k to $5k that you save is then used to build up a diversified portfolio of (a total of) 3 or 4 ETFs covering the S&P500, the NASDAQ, MSCI EAFE, and possibly a Japaense/European/Canadian index. Over time (as the evidence suggested at http://www.bylo.org/ would suggest), your low-cost ETF portfolio will outperform a vast majority of actively-managed mutual funds, and it requires relatively little maintenance on your part. This is exactly the kind of portfolio you want to build as a student -- you want an investment platform that you can put on "cruise control" while you focus on more important things (like studying, partying, getting a girlfriend/boyfriend, etc.).
By the time you're ready to move on to more advanced stock/bond investing, you will probably know that there are better forums for these kinds of questions, and you will go there. Good luck.
Let me 3rd this statement. You are getting way ahead of yourself if you are looking to invest and spend your money. Hang on to it. As someone who had to work their way through college, you can never have too much of a cash reserve, just in case. A couple of times, I found myself in situations where I had no cash and needing money bad. Usually this accompanied a trip to the bank of Mom & Dad. But still, if I could have done it on my own, I would have.
Don't forget, with loans, you are going to come out of school with debt. Why not plan to have some cash on hand to start paying that off early? Trust me, paying that debt off should be priority #1.
Going back to point #1 - I will say that this applies to just about anyone. If you have reserve cash - hang on to it, you never know if you will need it in a snap. To many of my friends had a glob of cash from different things (insurance payoffs, VC money, loans money) and spent it too fast, and found themselves high and dry when it counted.
RonB
It is human nature to take shortcuts in thinking.
This loan money is money you're going to need to repay in a fairly short time, right? The stock market is volatile. When you need the money a year or two years from now, the stock market could be way up from where it is now. It could also be down--possibly by 25% or more. And that's just the market indices. If you invest in individual stocks, rather than index funds or other diversified mutual funds, your investment's value could fluctuate even more.
Better options:
Finally: have you thought about the ethics of using your student loans in this way? Were the loans given to you in order to help you pay for your expenses as a student? Do you think it's okay to ask someone to loan you money for one thing and then use that money for something else? Isn't that a form of lying?
I also agree it's probably going to take another few years before stocks are a good investment - say, 2012-2015 - and we're going to need a major market dump before that happens. As one market analyst remarked some 30 years ago "You can't breathe in all the time; at some point, you have to exhale". It's just so with markets - the cycles the poster above referred to are the result of new technologies changing societies and markets, and then a sort of 'resting period' while they digest all those changes. The bull market from 1916-1929? Society was investing in cars, telephones, and radio. A bear market while that was digested. The bull market from 1949-1966? Television, jet travel, mainframe computing. Then a pause from 1966 to 1982 while they were digested. The bull market from 1982 to 2000? PC's, internet, cheap telecoms, broadband cable, etc., etc. We're still digesting those changes.
My guess is the next boom will be fueled by major advances in biotechnology, natural language speech recognition and synthesis, and, of course, pr0n and anally implanted RFID's.
What was once true, is no longer so
I found myself in much the same conundrum--overall, I needed to finance my education with loans, however I knew I would need to have a small contingency fund for when I graduated. Many people can't rely on just moving back home for a few months while they look for a job. Alot of students count on having that rainy day fund.
Basically, since you're dealing with a short term investment, you want to aim for stability, but since a student's financial situation is also topsy-turvy, you want flexibility too. With that you really have a limited set of options. Here are the four best, in order from lowest return to highest:
1) conventional savings account -- maximum flexibility, minimal return.
2) high-yield savings -- something like an ING Orange account, which places minimal limits on transactions, is FDIC-backed, and has a respectable interest rate compared to a regular savings account.
3) money market account -- not federally insured, but higher returns and most let you make a few withdrawals without penalty, so you can get at some of your money if you need it earlier than planned.
4) certificate of deposit -- returns at about the same level or slightly better than the money market option, but your money is locked in for the length of the CD, unless you want to pay a hefty penalty. This is your best option though if you know for sure that you won't need the money until a given time.
Realize that all four aren't exactly lucrative options... right now the max you'd probably get is between 4.5 to 7% interest on the latter two options. And the savings account option is barely an investment in terms of return... I get a paltry 0.55% on my savings, but hey, it's stable and I can get at my cash whenever I want.
I noticed alot of people were critical of trying to invest while taking out student loans. As long as you're not taking out the loans for purposes of investing them, there is nothing wrong with what you're doing. The federal financial aid process is designed to take into account your existing assets and projected earnings during the school year you are receiving a loan for. If you already have or earn funds that you would like to invest, there is really no restriction on this, so long as you can prove that the balance of your loans was applied to legitimate educational and living expenses as defined in the terms of your loan.
I also fail to see why some people consider the possibility of investing while taking out student loans to be illogical or unethical. It's financially prudent to at least retain a reasonable sum of reserve funds at all times, especially if you know you will need that money later, for when you can't rely on loans to help cover your expenses. It's really just a question of finding a reasonable balance between holding on to money now and saving yourself from later costs from interest on your loans.
To those who think it's unethical to retain funds in a sound investment while taking out taxpayer-backed loans, it's quite clear that these people don't understand the basics of how loans work. When you buy a house and get a federally-backed loan, they don't expect you to empty your entire checking and savings account, 401k, and kids' college fund before giving you the loan. That would obviously be counterproductive, as you'd simply manage to send the person careening into an instant bankruptcy. So why should you have to completely bankrupt yourself to pay for your education? Clearly anyone who makes such a criticism does not understand basics of how things like student loans, credit and mortgages work--and clearly you shouldn't listen to their advice!
And BTW, "federally backed" loans does not mean taxpayer funded for the most part. The system of loan guarantees is funded with seed money from the federal government--thus from the taxpayers--but once the money is placed in the system, it is recycled into new loans over and over again, and the default rate is sufficiently low so as not to trigger growth in the federal inputs into
Because you don't really own it if you have even a single cent of debt. Remember, the debtor's property rights trump yours. What's worse, you can't simply walk out from debt, while you can walk out from a rented apartment - which means that if you become unemployed, or need to move somewhere else (to get a new job, for example) you are in it deep.
Never take any debt if you can avoid it; always pay with cash; if you can't pay with cash, ask yourself if you really need the thing right now. Debt is a risk - you may not be able to pay it back - and a shackle - you must keep on paying it until it's all paid out. Paying with cash means that you have less opportunities for investments, since you don't have as much available cash; but it also means that you have much more freedom to act in unexpected circumstances.
Add to the above the concepts "interest" and "interest on interest" and it's clear that debt is not worth the risk. And if you still need further prove, consider this: Why did your debtor lend the money to you ? Surely, if you can invest the money in ways that exceed the interest of the debt, he could as well. This is an especially good question when the debtor is a bank or some other financial institution which can consult financial experts; you are not likely to know better than they do.
To GenKreton: Taking loan to save your own money was stupid. Loans must be paid back with interest. You'd been better off living out of your own money and only borrowing money if you actually needed it.
The people who sell the houses are presumably making a profit as well, and a greater one than if they simply rented them out. Either that or they are doing it from the goodness of their hearts, which, since they are usually corporations and therefore have no heart, is not very likely.
Forget magic. Any technology distinguishable from divine power is insufficiently advanced.