It's almost 2024, and you have a few dollars stashed away from birthday and holiday gifts, and you're wondering what to do with it. Should I buy that new TV, or should I invest? Maybe I don't have enough money to start buying stocks or bonds, so do I treat myself to a little something special instead? Look, we all have choices to make. Sometimes, you deserve to splurge, which usually means only short-term gratification. Starting a plan to make your money work for you while still in college can have long-term rewards because you're investing in yourself and your future. And you don't have to have a lot of cash to start. You can begin small and build from there. Our Money Matters explores how to start making your dollars go further.
Investing 101
So, what does investing actually mean? There are numerous ways to invest, whether it's stocks, bonds, mutual funds, certificates of deposit, etc. However, the goal is always the same: to increase your wealth. Compound interest is one of the primary growth drivers of investing, meaning that interest accrues on both the initial deposit and the accumulated interest from previous periods. For example, suppose you buy a stock for $20 that goes up to $25, and that stock goes up another 10%. In that case, you're getting 10% not just on your original investment of $20 but also on the extra $5 you made.
Before Getting Started
Before you do anything, educate yourself about the fundamentals. Our Money Matters offers helpful tools and resources for investing smarter and gaining confidence. And it's free to sign up. People assume that a lack of money is why people don't start investing. However, many need more financial confidence before they begin. In a recent WSFS Wealth survey, only half of the respondents felt sure about their investing ability. And unfortunately, just 27% of women thought they had the knowledge to take the first steps. It's vital to understand the difference between investments that may have less risk, like money market funds, CDs, and IRAs, or others that involve a bit more risk, like stocks, but also offer more rewards. Once you understand the basics, you can determine what makes the most sense for you so you can reach your specific goals.
Secondly, pay off any debt you have before doing anything. Investing is a long-term strategy that helps you grow your money because of compound interest and dividends. However, with interest rates on credit cards as high as 25%, that debt will likely cost you more money in the short term than you will make, so get out of the red first.
Types of Investments
There are many types of investment opportunities, but when you are first starting out, it is probably best to be a little more conservative. We have broken out some of the best-known options below and the potential risk factors.
High-yield Savings Accounts, CDs, and Money Market Accounts
A high-yield savings account or a certificate of deposit (CD) are both great ways to begin with little to no risk. These accounts pay interest on your deposits at higher rates than what is available through traditional savings or checking accounts. And thanks to an overall rise in interest rates, the rates available on these accounts are the highest they've been in a long time. With a high-yield savings account, you don't have any restrictions on when you can access your funds. In contrast, CDs pay you a fixed interest rate in exchange for committing your money to the bank for a specified timeframe. Money Market Accounts (MMAs) are similar to CDs, but your money is more accessible. Therefore, they earn lower interest rates than CDs because you are not obligated to any time frame. However, money-market accounts (MMAs) generally have more significant minimum balances.
Index Funds
Many of the most popular funds are based on the Standard & Poor's 500 index of large American companies. This type of fund holds shares of all the stocks in the index, which can be in the hundreds in the case of the S&P 500. Investing in an index fund means holding stocks across various industries diversifying your risk. Buying an S&P 500 index fund is like buying a little bit of the whole market, which means you benefit from the overall market return. It's a great way to understand the process before diving into something with more potential downside.
IRAs
You may think you don't need to worry about your retirement while still in college. However, if you start when you are young, you will have a much larger nest egg than waiting until you are in your thirties or forties. If you are working, an IRA allows you to defer taxes on any profits or dividends and deduct your contributions from your taxable income, saving you money on taxes. A Roth IRA can also offer an opportunity to prepare for your future. But contributions to Roth IRAs are made with after-tax dollars, so there aren't any immediate tax savings. That said, withdrawals you make during retirement will be tax-free. By making contributions when you're in college (and likely paying a low-income tax rate), you'll avoid a larger tax bill in the future when your income will be taxed more. Both types of IRAs enable you to accumulate interest on your investment tax-free. The caveat is that you must be working, or in the case of a Roth IRA, you or your spouse must work.
Money-market Funds
A money market fund is a kind of mutual fund that invests in highly liquid, near-term instruments such as cash, cash equivalent securities, and high-credit-rating, debt-based securities with a short-term maturity (such as U.S. Treasuries). Though not as safe as cold hard cash, money market funds are extremely low-risk. However, they are not the same as a money market account (MMA), which we discussed earlier. A money market fund is an option an investment fund company offers and carries no principal guarantee. A money market account is a type of interest-earning savings account provided by a financial institution such as a bank, and they are insured by the Federal Deposit Insurance Corporation (FDIC).
Bond Funds
A bond fund is like a mutual fund except that the investments are solely in bonds and invested primarily in government, municipal, corporate, convertible bonds, or other debt instruments, such as mortgage-backed securities (MBS). A bond fund's primary goal is to generate monthly income for investors. It also has lower risk and is another excellent method for diversifying your portfolio.
Individual Stocks and Bonds
When you buy a stock, you purchase one piece of one company, thereby owning a portion of the corporation's assets and profits depending on the number of shares you own. Most stocks are bought and sold on exchanges such as the Nasdaq, the New York Stock Exchange, or international exchanges, but you can purchase them through an app or a broker. However, stocks require much more diligence because you must ensure that the companies you've invested in aren't having business problems that could affect their value. That means keeping up with the news on each company and monitoring industry and economic trends. The benefit is that you see reduced fees because you no longer have to pay the fund company or an annual management fee on an ongoing basis. You only pay a fee when you buy and sell the stock. You must own between 20 and 100 to diversify and reduce your risk if you purchase individual stocks.
A bond differs from a stock in that it is essentially a loan from an investor to a borrower, such as a company or government entity. The borrower uses the money to fund its operations, and the investor receives interest. Bonds come with a high-interest rate during inflationary periods, are less risky than stocks, and protect your portfolio against inflation. However, rates are variable, and there is a minimum amount of time in which you must invest with early withdrawal penalties.
Sign up for a Robo-Advisor
If you’re uncomfortable picking an index fund or individual stocks or bonds yourself, consider a robo-advisor. Robo-advisors manage your money according to an algorithm based on your goals and risk tolerance. You can get started with a little as $20 and as you add money, you don’t pay additional transaction fees. Most of these services charge an annual fee based on a percentage of your assets, usually 0.25 percent or about $25.00 for every $10,000 invested. Wealthfront and Betterment are two of the larger robo-advisors you can check out.
The Bottom Line
Investing can lead to long-term financial success, so the earlier you start, the better. However, it can be confusing, so do your homework first to understand the pros and cons, risks, and rewards. It is also good to consistently add money and/or reinvest your dividends into your account. That also diversifies your risk and allows you to weather downward trends. If the market drops, you can buy more shares at a lower cost. Remember, investing is a long-term strategy. Unless you plan to make a career as a day trader, you shouldn't change your portfolio daily or panic if there is a downturn. Although there are fluctuations and periods where the market is down, the average return on the stock market has been about 10% per year for nearly the last century, as measured by the S&P 500 index. In some years, the market returns more than that; in other years, it yields less, so stay steady and plan on being an investor for the long term.
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