As a college student, you likely have at least a fleeting understanding that “investing” is a good thing, but you probably haven’t had much hands-on experience investing in anything. Not only are you busy attending classes and building a future career for yourself, but you’re also tight on money—especially considering the average college student graduates with $30,000 in debt these days.
But there’s a real advantage in starting early. Even if you only invest a few hundred dollars, you’ll have several advantages starting in your 20s:
- Compound interest growth. Compound interest, the accumulation of interest on interest, can grow your principal exponentially. Starting this process in your 20s, rather than your 30s, can help you grow your wealth much, much further.
- Risk tolerance. Young people have higher risk tolerance, which means you can take bigger investment risks and not worry about taking a loss (since you’ll have so much time to make up for it).
- Experience. Starting in your 20s means you’ll have a decade of experience by the time you start getting serious about investing in your 30s. That can give you a huge leg up.
Those benefits sound good, but how are you supposed to get started?
First, you’ll want to learn the most common types of investments to seek, as well as their advantages and disadvantages.
- Stocks. Stocks represent fractional shares of ownership in a publicly traded company. Buying a single share of stock in a company makes you a partial owner, which means you may be able to collect a quarterly dividend payment from your investment, or you may hold the stock as it increases in value over time, eventually selling it to make a profit. Stocks can be risky, depending on which companies you choose, because if a company fails to become or remain profitable, the value of a stock can decrease. However, the broader market tends to see impressive gains on average, especially over long time periods.
- Bonds. Bonds are safer investments than stocks, but they tend to see a lower average return. They represent loans to companies, organizations, or the government, and typically come with a fixed interest rate as a rate of return.
- ETFs and mutual funds. Mutual funds are collections of stocks (and sometimes bonds) designed to help you diversify your portfolio all at once, making them great investments for people who don’t know much about stock trading. However, they usually come with management expenses, lowering their potential return. Exchange traded funds (ETFs) trade like mutual funds, but typically have much lower (or nonexistent) fees.
- Real estate. You could also invest in property, either to capitalize on rental income from tenants or to gain from the increase in your property values over time. These are valuable and real-world investments, but they can be hard to get without a significant sum of initial capital. You could, instead, invest in real estate investment trusts (REITs), which give you exposure to the real estate market without direct ownership.
You can choose to specialize in just one of these areas, but it pays to know a bit about all of them.
Before you start investing, you’ll need a vehicle and a platform with which you can buy and sell assets. If you’re interested in real estate, a real estate agent may be able to help you. Otherwise, consider opening a retirement account like a Roth IRA—Roth IRAs have a maximum contribution limit (currently $6,000 per year), and can’t be touched until you’re of retirement age (59.5 years old for most people), but allow you to grow your principal tax-free.
You could also open a brokerage account using a mainstream brokerage platform. If you do, expect to pay a capital gains tax on any money you make by selling your assets. Either way, you can expect to pay a fixed fee for each transaction (buying or selling) you make on the platform, usually a few dollars per trade.
Your First $500
Most brokerage platforms will require an initial deposit of a few hundred dollars. Try to make $500 your minimum target; this will give you enough money to play with in the investment realm, but shouldn’t be too hard to accumulate. Just cutting one or two monthly subscriptions or entertainment indulgences could help you accumulate this in a year or less. Getting an extra part-time job or putting in more hours could also help.
Once you have this, do some research and make your first investment. Don’t worry too much about making the absolute best pick; instead, focus on making a decision with solid reasoning. Regardless of whether this choice pays off or not, you’ll get the opportunity to learn from it, which is the important thing. Keep pushing yourself to learn more, reading financial news, looking up terms you don’t understand, and talking to more experienced investors. Everything will seem unfamiliar and intimidating when you first start out, but after a few months to a few years of consistent effort, you’ll be surprised at how much knowledge you’ve acquired.