How to start investing while still in college

My son and 2 of his friends rent from me while they attend college. Not too long ago, they were talking about their interest in investing. They had tried various gut-wrenching experiments, including cryptocurrency arbitrage (what?) and options.

After losing a modest amount of money, they decided to ask me to make a presentation on investing. They weren’t interested in speculation or get-rich-quick schemes. Instead, they looked at where I am in life right now, and the lifestyle I live and wanted to know how I got here — and wondered whether they could get started as college students.

This is what I told them.

Investing is important

Investing is the way you put your money to work on your behalf. When you invest, you have the chance to see gains that you aren’t likely to experience simply by putting your money in a savings account.

It’s true that investing comes with the risk of loss. However, over long periods of time the stock market as a whole has yet to lose. If you’re looking at a period of 20 years, the stock market is likely to come out ahead — which means you’re likely to make money if you’re betting on the overall stock market.

When your money is making money, it’s doing the heavy lifting.

Getting started as early as possible allows you to take advantage of the potential for compounding returns. When your money is making money, it’s doing the heavy lifting. If you invest consistently over time, increasing your contributions as your finances improve, there’s a good chance you’ll reach financial independence sooner, or at least be able to quit your job before you’re too old to enjoy life.

How to start investing with a small amount of money

Back in the day, investing was a huge mystery. You had to call a stockbroker. There were fees to consider. Unfortunately, too many people still think you need to have several thousand dollars to get started investing — and they think it’s complicated.

A huge shift has taken place in the last 20 years and today investing has largely become accessible to the masses.

A huge shift has taken place in the last 20 years and today investing has largely become accessible to the masses. You only need a few bucks to get started as an investor, thanks to apps like Stash and Robinhood that allow you to buy stocks with as little as $1. On top of that, Stash, as well as Acorns, will allow you to connect a debit card and round up your transactions so you can invest with pocket change.

Robo-advisors like Betterment and Acorns help you invest by taking the guesswork out of the process. You decide how much you want to invest each month, and these robo-advisors will automatically invest in funds, based on your preferences. This can be a good way to make the most of your extra dollars and get started investing.

Consider index investments

While cryptocurrencies are all the rage, and it’s possible to buy some tokens for a small amount of money, individual speculation can be stressful as prices fluctuate. Instead, consider using index investments. These are collections of investments that allow you to take advantage of a wide swath of the market.

Over time, as the market as a whole heads higher, you reap the benefits.

For example, an exchange-traded fund (ETF) based on the S&P 500 index gives you exposure to the 500 biggest companies on the stock market. Rather than trying to pick a “winner,” you can take advantage of wider market performance. Over time, as the market as a whole heads higher, you reap the benefits. The returns might not be sexy, but they are a little more stable over a period of years than dealing with individual stocks or investing in cryptocurrencies.

For beginners with a small amount of money, index ETFs and index funds can be viable ways to just get money in the market to start growing.

Set aside the same amount each month

When you don’t have a lot of money to invest, consistency is key. Set up a system to automatically invest $5 a week to get started. Many apps and robo-advisors let you invest in fractional shares. Basically, if you’re investing in an index ETF that’s $100 a share, you end up buying 5% of a share each week. It might not seem like a lot at first, but over time, you can take advantage of compounding returns.

As your finances improve and you start making more money, you can increase how much you set aside regularly.

As your finances improve and you start making more money, you can increase how much you set aside regularly. Increase your weekly investment to $10 and then $15. Pretty soon, you’ll be in the habit of setting money aside — and you’ll be surprised at how your portfolio balance is growing.

Look for tax-advantaged accounts

Don’t forget that the government wants you to set aside money for the future. Tax-advantaged accounts can help you get more for your money — as long as you’re willing to wait until you’re older to access your gains.

If you have a job that offers you a 401(k), consider having money taken directly from your paycheck. When you have a traditional 401(k), the money comes out before you pay taxes on your income. This lowers your taxable income, saving you money today. Later, when you withdraw money from your account after age 59 ½, you pay taxes. The nice thing about a 401(k) is that some companies match a portion of what you put in. That’s free money invested on your behalf, growing for your future.

Just make sure you understand the rules for accessing your money so you don’t end up paying extra penalties.

Even if your work doesn’t offer a 401(k), you can still save using tax-advantaged dollars. Consider opening an individual retirement account (IRA). You can set aside money and grow your wealth based on your goals and needs. For many college students, a Roth IRA can be a good choice. You have to fund the account with after-tax dollars — so you pay taxes today. Later, though, you don’t have to pay taxes when you withdraw. If you have a small income and don’t pay much (and maybe pay nothing) in taxes right now, you could potentially benefit from a Roth IRA now. Just make sure you understand the rules for accessing your money so you don’t end up paying extra penalties.

Bottom line

Investing is one of the best ways to build wealth for the future. You don’t need a lot to get started. Figure how much extra you can set aside each month and consider opening an investment account so your money can work just as hard as you do.