We can all agree that college is an investment.
Tuition prices are rising, debt is increasing and it’s becoming crystal clear that getting a degree is a lot of money up front for a life-long return.
While those increasing costs are intimidating, it’s important to remember college grads make about $1 million more than those with high school diplomas.
And while all of us pretty much acknowledge that college is an investment, we’d have a much harder time agreeing on whether or not college students should invest money into a retirement accont.
The question itself seems a little crazy.
After all, our idea of a college student is a cash-strapped kid studying for exams over a bowl of noodles, a beer and a few pennies in their pocket.
The prospects of scrounging up extra cash to contribute into a retirement fund – let alone food for the next week – is impossible, right?
Well, after talking to some experts and doing some research on our own, we’ve discovered that while investing requires smart money management, it could be very well worth the sacrifice in order to gain the long-term rewards.
Isn’t It Kind of Impossible to Save for Retirement While You’re in College?
As we mentioned a few seconds ago, asking college students to invest in their retirement is a little crazy considering how frustrated most of us are about rising college costs.
Telling college freshmen they should start tucking away their extra cash into an IRA would be like telling a marathon runner they need to finish a few 400-meter sprints in the middle of their 26.2-mile slog.
“They’ve got a point,” he says. “Students are looking down the barrel of a huge expense and I can imagine college costs need to take some precedence.”
However, Mike said, there’s a misconception out there that young investors need to pour boatloads of cash into their 401k’s, IRA’s or ETF’s. That’s not the case with college students, he says. When you’re young, your investments are more about habit than they are about size.
“Saving for retirement is about developing the discipline to save. The sooner you invest, the better,” he says. “The action of saving extra income won’t create your retirement, so to speak, but it will develop the habit of building for your future.”
Kent Cubbage, Ph.D., agrees with Mike. Kent is a department chair at Aiken Technical College in Aiken, S.C. He says part of developing a habit of investing is taking some time to look beyond the next four years and get a sense of the next four decades or more.
“Oftentimes when we’re young and in college, the idea of 20, 30 or 50 years from now is an abstraction,” Kent says. “You need to sit down with someone who can help you write down the next six decades of your life and show you how a little bit of money invested now can make a huge difference.”
Students can feel a little awkward talking to their parents about investing, Kent said, so professors and college staff are often a good resource.
“Professors are life coaches and psychologists and therapist all at the same time, and a lot of colleges and universities have counselors and life coaches,” Kent said.
Those resources will help you start changing your mind about how you view your financial future.
“Money and investing and budgeting is 90 percent psychological and 10 percent mathematics. Saving and investing is a mindset,” he said. “Thinking for the long-term, unfortunately, isn’t something today’s students tend to do.”
While long-term financial thinking may not be common among incoming freshman, Mike McGrath said, today’s millennials have a huge advantage over older generations: their love of technology. And that leads us to the next section.
Robo-Advisors and Traditional Investments Are Great Options
The investment landscape we live in today is a lot like the mobile phone market. The options that are available today are a lot sleeker, smoother and more versatile than what was available two decades ago.
Kent Cubbage talked about what investing was like 20 years ago. You’d walk into a brokerage office and talk with an investment expert.
“A lot of brokerage houses and investment places have made things a lot easier. My dad used to have to go to a fancy brokerage house to set up his retirement fund,” Kent said. “But now, the average person who is old enough to invest can set up a retirement account or a savings account in a matter of minutes instead of days or months like decades past.”
The rock star of today’s investment opportunities are robo-advisors. Apps like Betterment, WealthFront and Acorns can be set up in about 15 minutes. The apps can take scheduled payments out of your bank account, or, in the case of Acorns, can deposit the change from every purchase you make on the credit card linked to your account.
“Robo-advisors are well suited for people who don’t have massive amounts of money,” he said.
And, of course, each of the robo-advisors we mentioned are tailored made for mobile use.
Another benefit to robo-advisors is that they don’t require a lot of maintenance, Mike McGrath said.
“Robo-advisors are great for this generation,” he said. “They have preset parameters and everything is pretty much done for you.”
Robo-advisors place your money in what are known as exchange-traded funds, or ETF’s. These funds are a collection of funds that follow the success of indexes like the S&P 500, which is a collection of the top companies on the market. The thinking is that crafting an ETF to follow reliable indexes is a safe, secure way to invest your money.
However, ETF’s aren’t the only way to invest money. If you’re working during college, your company may offer a 401k, a retirement account in which money is taken out of your paycheck and placed in the 401k. Many times, the company you work for will match your deposits up to a certain percentage of your overall salary.
As Forbes writer Ashlea Ebeling wrote, the typical setup is that companies will match 50 percent of whatever you contribute to your 401k up to 6 percent of your salary. So, if you’re making $20,000 a year and you contribute 6 percent over the course of the year ($1,200), your employer will contribute $600. How much of a difference will that make over the long haul? We’ll get to that in a second.
Other popular investment opportunities are IRA’s or Roth IRA’s. You can contribute up to $5,000 a year in these funds, with the main difference being when you’re taxed.
Here’s how RothIRA.com’s Kelly Spors put it: “With traditional IRAs, you avoid taxes when you put the money in. With Roth IRAs, you avoid taxes when you take it out in retirement.”
Kelly’s breakdown of the details of each retirement plan is pretty informative, so take a look when you get a chance.
Robo-advisors, 401k’s and IRA’s – each has its own unique functions. Once you choose one of these investment types, the real question is: What benefits does early investment have? Why use money for retirement that could go to beer, pizza or dates?
Compound Interest is Begging You to Invest at 18 instead of 25
Remember earlier we said the key to investing young was to build habits you can take with you when you graduate? Think of that as the philosophical side of investing while you’re in college.
In this section, we’re going to talk about the numbers side of investing and why it’s so important to start while you’re young. We’ll keep the statistics simple by using the Securities and Exchange Commission’s compound interest calculator.
Let’s start out with a small investment of $10 and contribute $10 a month for the next 50 years, with a modest return of about 7 percent a year. On your end, you’re investing $6,000. Doesn’t sound like much, right? But after 50 years, that $6,000 actually turns into $49,078.04. No tricks or scams here, just simple math.
At the end of the first year, you’ll contribute $120. With 7 percent interest, you’ll have made $8.40 on your investment. Your new total? $128.40. The following year, your interest builds a little more and you’ll end up with $259.85.
You can see how, over the course of 50 years, that money can grow without you having to lift a finger.
“It’s exponential growth over a long period of time,” Mike McGrath said. “You may not have a lot of money, but getting the behavior down now means you’ll have that much more money later in life. Realize that you can live with a little bit less today so that you can have a lot more later in life.”
There’s also another factor at stake as you decide whether or not to invest young. If you wait 10 years to invest (30 instead of 20), you’re going to miss out on a lot of money down the road, Motley Fool writer Morgan Housel pointed out.
Assuming you invest in the S&P 500, you’ll experience a 6.6 percent return on your money every year. If you start investing when you’re 20 until you’re 65, every dollar you contribute will end up being worth $18.50. But let’s say you start investing at 30…your $1 will be worth about $10. At 40, every $1 you invest will be worth about $4.50 when you hit 65.
To put it another way, if you start investing when you’re 30, you’ll need to contribute twice as much in order to match what you’d earn if you started at 20.
“Think about that. From the time you are in your 20s and 30s until your 60s, your weekly wages might double. But money saved in your 20s and 30s could very realistically grow tenfold by the time you reach your 60s,” Housel wrote. “Saving a little bit of money when you are young can be a more efficient way to build wealth than saving a lot when you're older.”
Sounds like a pretty easy path to making a lot of money on your investment, no matter how small, right?
If you’re convinced that you want to invest but feel like you don’t have enough money to make a difference, get creative. Find different ways you can earn a little money on the side.
Tips for Saving or Earning Extra Money You Can Use to Invest
Kent Cubbage recently wrote a book titled, “So You Think You’re Ready for College? Critical College Skills That Don’t Show Up On a College Application”.
He offered the following suggestions for earning money, either by taking on new work or avoiding costly mistakes:
1. Be wise when you buy textbooks
Heading to your school’s bookstore as soon as you know what books are required means you have a much better chance at scoring used books, which could save you, in some cases, $50-$100 per book.
2. Meet with your academic advisor
Occasional check-ups with your advisor will help you avoid taking unnecessary courses. Unnecessary courses = wasted tuition money.
3. Be clear on which credits will transfer
Community college students should be extra sure the courses they’re taking will transfer to the university/college they want to attend.
4. Part-time work
This isn’t a new idea, but a relevant one. Business districts around campuses (and within them) are usually staffed with part-time workers. Even an extra $100 per week can be a huge help in your investment plan.
5. Get an extra roommate
Another simple tip, but one that could save you a couple of hundred dollars per month.
Putting these five tips into practice has the potential to save you thousands of dollars. Remember how much one dollar is worth if you invest it for 45 years? $18.50.
If you can save $2,000 per year through used-textbook purchases and part-time work, then invest it with a modest 6.6 percent return, that $8,000 will turn into about $144,000 in 45 years.
A Quick Review of Why Investing in College is a Big Deal
Investing is probably the last thing on your mind if you’re a high-school senior preparing to go to college.
Tuition rates are sky-high and people aren’t happy about it. Seems pretty absurd to talk about building wealth, right?
If you’re a little skeptical, we understand. But think back to the example we gave you earlier. If you deposit $10 into an IRA, for example, and contribute $10 a month for the next 50 years, your $6,000 total contribution will grow to nearly $50,000.
The numbers side of things is just half of the story, though. Getting an early start on your retirement savings will teach you the discipline you need in order to follow through on regular contributions as you get older and earn more money.
All it takes is one moment of realization of how compound interest can turn $1 into $2, Kent Cubbage and Mike McGrath told us:
- Kent: “It’s … about having that first win. Save for a year and see what effect it has on your savings account. Get that first year under your belt and that will make a huge difference.”
- Mike: “My son has a part-time job and he makes a little bit of money and puts some of it in school-related costs, but he’s also set up an IRA with Charles Schwab. I think he dropped in $125. I walked him through the website, and showed him how to research and what it means. One day he said, ‘Dad, my account grew $16!’ You could see the light bulb go on.”
Once the light goes on and you see the benefit of investing, you’ve got a lot of choices out there. We’re not financial advisors, but in our conversations with professionals who are, robo-advisors come highly recommended, especially for those who don’t have a lot of money to invest.