How can a poor college student, that doesn’t have $1000 on hand, start investing?
– A PTY reader
Your boat is my boat, my friend! It’s hard to scrape together enough money to put gas in my car – how can I save up enough to start investing and take advantage of sweet, sweet compound interest?
Should I Invest?
First things first, you’ve got to figure out if investing is a good idea for you right now. When we say “investing,” we mean “buying stocks and holding onto them over a long period of time.” With this in mind, ask yourself three questions before you start looking for ways to invest:
What’s my goal?
Since investing is so long term, you should really save it for goals that are 10+ years off. If your goal is shorter-term than that (say, a new car in five years or a down payment on a house), you should look into more conservative investments, such as bonds, CDs, and money market funds. If your goal is something like “retiring in something better than a shack,” then stock investments are your friends.
Could my money be put to better use?
It seems like investing is the best thing you could do with your money, right? But that’s not always true. If you have any debts with interest rates over 10%, you’re better off funneling your money into paying off your debt. Compound interest works both ways, so high interest rates on debts will only work against you.
Do I have enough savings?
Along the same lines as above, your money might be put to better use preventing debt. This means having an emergency fund and a “getting established fund” to take care of expenses you’ll incur when you start off on your own. You know, like security deposit and furniture for your fabulous new apartment. Don’t go overboard, but make sure you’ve got a nice cushion of savings before you dive into investing.
Investing What You’ve Got
So, you made it through the three questions, and you’ve decided it’s time to start investing. But, that just brings us back to the original question: HOW? The way I see it, there’s two ways to go about this:
No-Minimum Online Brokerages
Check out sites like ShareBuilder and Zecco – you can buy stocks and pay less than $10 in commission each time. Since there is a charge, what you’ll want to do is save up your investment money in a savings account, and then buy larger amounts every few months.
What, exactly, are you buying? Well, if you want to try your hand at individual stock picking, that’s your deal. But what I would do is buy index fund ETFs. These are little funds that act like stocks, but what’s really inside them is a tiny share of every stock in the market that it’s tracking. So if you buy an ETF that tracks the S&P 500, you’re getting a tiny share of each of 500 companies! Instant diversification.
Or… Save Up for Vanguard
Ok, so, why buy index fund ETFs instead of just buying index funds? Well, this again brings us back to the original question: how to do this with less than $1,000. Index funds have a really big buy-in. Vanguard’s index funds require a $3,000 minimum investment! Who’s got that lying around?
But the advantage to buying an index fund directly is you go from paying commissions to paying “expense ratios” – or a percent of the value of the fund. The reason I bring up Vanguard is that they’re known for having one of the lowest expense ratios around. Mmm… tasty low-cost index funds… that’s what I want!
So here’s what I’m doing: I’m putting money away each month in a savings account, building up to that $3,000 minimum investment. Once I get that, I can buy my coveted Vanguard index fund! And once I’ve made the initial investment, I can buy individual shares of that fund at my leisure. (I’ll do this within a Roth IRA, since the goal here is retirement!)
Saving up $3,000 can seem really, really frustrating. In fact, it was so frustrating to me, that I just gave up the first time I found out about Vanguard’s $3,000 minimum. I was 18 at the time, and I just pushed it out of my head – I’d never save up that much!
But… if I’d put aside $100 a month instead of giving up, I would have reached $3,000 six months ago. That’s food for thought.
QL girl says
Does Vanguard not have an automatic investment plan? I ask this because I know that some places will waive the $3,000 minimum if you commit to contributing $50/month (at a minimum). That’d be something to look into…
@QL girl – yes, I believe they do. I didn’t mention it because college students tend to have more erratic budgets – many of us can’t commit to something like $50 a month, every month. It’s definitely an option if you can make the commitment, though!
Don’t overlook the fact that you ETFs will have an expense ratio as well. Still, I’ve been saving/investing for about 10 years now and I would recommend ETFs for beginners. The expense ratios are lower than mutual funds and you can get in cheaper (i.e. at the share price) so you can start earlier.
You definitely want to do a discount broker like Zecco, Sharebuilder, TradeKing, or Firstrade, and limit your transactions so you don’t incur too many transaction fees. I use Firstrade, but others have their advantages as well.
If you need money to invest as a college student, why not take advantage of the services offered by University of Student Savings. This company allows you to both save money by utilizing discounts and also make money with their “referral program.”
The referral program is located at http://www.uofss.com/makemoney.html
Richard @ Student Scrooge says
Nice article; I think you’re making the right call saving up for a larger fund. It has been a while since I looked at Sharebuilder, but I seem to remember it not being a great deal once you took all the fees — both buying and selling — into account.
I think Vanguard’s STAR fund has a $1,000 minimum even without a commitment to automatic payments, but I’m not completely sure on that.
You’ll want to look into the minimums at Vanguard again. I thought you could start with $1000 if you commit to automatic monthly investment of at least $50. Don’t take my word though.
Would you still recommend committing to a mutual fund? I’m trying to save for a house and fortunately was socking away some moola into a monthly savings program (it’s an account that needs x amount of money for at least 12 months with y interest–what are those called again?). So, I”ll be collecting that soon and want to know where I can get my money the most play…
This was a great post! There is so much turbulence in the market today, and people need peace of mind more than ever. I wanted to offer your readers a link to another blogger who is doing great work. He writes about our ‘childhood money messages’ and how the best approach to stability in today’s market is to resist letting these emotions control our buying/selling habits. It is really fascinating work, and something you should all check out. His name is Spencer Sherman, and you can view his blog at http://www.curemoneymadness.com/blog.
Keep it simple invest in a healthcare fund or an index fund for the long term. You make way more than what the bank pays with less risk than individual stocks.
Rika Susan At Home says
Your are making some good points here. An investing plan and wealth building starts with baby steps. At first it will seem like forever before you see results, but if you start early, you can have a nice nest egg by the time you go to college. Apart from investing, the internet offers tons of opportunities for young people to begin a small business.
Stephen McFarlane says
Very well said about the investment and i like very much. You have explained very excellent points in your blog. And it was a great opportunity to start a small business. Thank u.
There are mutual funds that have monthly build up plans where investors can invest as little as $25 per month.