College students have a reputation for being a little on the poor side.
Most of us who went to college experienced it ourselves. Most people who get to college don’t have the money to pay for it out of pocket. Most don’t get total financial aid either. The remainder has to be paid through work, borrowed, or otherwise paid off, on the limited time and energy college students have remaining after studying and classes.
This is the reason that most people think you can’t save or invest while you’re in college.
But this isn’t actually the case. While some people might truly be too busy and cash-strapped to even think about this stuff, more college students could save and invest than currently do. It’s all about knowing how to work the right way, and living in a way that most people don’t.
First, you’ve got to get over your fear of student loans. Student loans have a terrible name in the press, as Millennials continue to strain under that burden with low paying jobs. But student loans are actually awesome. Student loan interest rates are so low, that they’re only a little bit above the inflation rate. This means that, essentially, the money you borrow was almost free. For people who really don’t want to take on student loans, the AAA Credit Guide Scholarship Program can help.
Investing is all about making money faster in one account than you’re spending or losing it in another.
That’s why people who have loads of expensive credit card debt (15-25%+) should pay down their debt before they invest. Even if they got awesome returns in the stock market of 10% every year, they’d still be losing money because their debt was accumulating much faster than their wealth.
It’s not uncommon for very conservative stock market and index fund investors to get 9% annually in returns. Some years are better, some are worse, but that’s not a bad or unrealistic goal. If your student loan debt has 4% interest, and you may 9% returns on investments, it makes sense to invest.
Investing during college has another major argument in its favor. Investments pay off because of long periods of time more than any other factor. If you get an IRA and buy $5500 in a total stock market index fund when you are 18 years old, that money will likely have grown to about $190,000 by the time you’re 50. If you waited until you were 28 to invest that same amount of money, it would only have grown to $36,000 by the time you’re 50. Of course if you invest as much as possible every year (not just the first one), you’ll have a lot more money in the end.
This is because of compound interest and the reinvestment of returns. When the value of your investment grows, that’s a bigger pool of money to grow more. Think of it like the proverbial snowball rolling down the hill. If you get dividends or other liquid returns, you can immediately reinvest them back into your original investment. This will cause a feedback loop that makes you richer faster.
Investing in college is tough, but if you can find ways to pay for your primary education, work a little extra on the side for extra cash, and invest in a way that gets you returns at a higher rate than you’re paying in interest on your loans, you’ll be very glad you did down the road.
