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A Shortcut on the Road to Investing

Investing during college can be a challenge. There are a few options to put away a little bit of money but for the most part we students tend to be strapped for cash and rarely have the time to analyze stocks. Perhaps the best thing we can do is set ourselves up for future investment opportunities.

Investing starts with budgeting or making a spending plan. Learning how to spend money effectively is a good skill to learn and can ultimately help us get what we really want in the long run rather than what we want in the moment. Remember to ”pay yourself first” by putting away money for big spending (this is also known as saving).

The purpose of investing is to provide an additional form of income and allow your own money to work for you. Money can make more money when compounding interest is involved. High-interest rate debts work against our compounding interest and have the opposite effect and end up costing more money. So we want to get rid of high-interest rate debts before investing.

One of the major challenges college students face is the short term need for money. Due to our circumstances as students, money in the short run is worth more than money in the long run. How does one put money aside when one needs it to buy food or pay for housing?  While many students, myself included, go into debt to pay for current expenses, many students may not be setting some of their income aside for emergencies. If we as students, begin contributing to our nest eggs without an emergency fund, we may have to immediately draw from our nest eggs. Our investments won’t be able to stay in the market long enough to gain good returns. Over a long periods of time, capital gains can make up for capital losses so it’s not so much about when we get into the market but more about how long we can stay in the market.

Often investors take their money out of the market when it crashes. This is done out of fear of losing money or an inability to sustain one’s self. One must make an emergency fund ranging from at least one month to one year to avoid the risk of needing to use invested money.  

After we get a one month emergency fund that can cover all of our monthly expenses we can begin investing. The best way to start is to look for tax shelters that can help our investments grow. There are many investment vehicles available that can defur taxes or allow our investments to grow tax free. If we are employed we may have a number of option of employee pension plans to choose from. These often come with employee matches so the money we contribute to our pensions can be matched by our employers. If our employers don't have pension plans, we can still open Individual Retirement Arrangements (IRA) with similar perks, minus the employer match. Up front taxes on Roth IRAs are very beneficial because earnings can grow tax free. Once your retirement account is created you can begin choosing investments. It is ideal to begin investing in low fee mutual funds or Index funds rather than trying to pick individual stocks because they are more diversified.

 

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Last Updated: 11/20/19