The world is chock-full of people who would sell you supernatural cat litter if they could get away with it. Sadly, the financial service industry creates more opportunists like this than any other field. As a young investor, it pays to be skeptical of every piece of financial advice you read. If you’re doubtful about what you’re reading here, good – the point is to keep an open mind while simultaneously analyzing the advice people are giving you for free.
The question at hand now is what types of investments should you consider? There are several different forms of investment that will try to trap young, unknowing people like yourselves – there’s foreign exchange trading, art and collectibles, property, bonds, stocks, money in the bank, you get the gist. Perhaps the biggest challenge that students face is how to make money to invest to begin with, but that’s a story for another time.
When you think of investing, stocks are perhaps one of the first investment tools that pop into mind. They’re a great way turn any surplus cash you have laying around into added cash that beats inflation. However, as an investment, there are certain risks to take into account, such as the success of the business, any rumors that may harm the value of an entity’s stock, developments in the industry or technology, etc.
In general, investing in blue-chip stocks offers very little risk of return, which is good news since as a student the losses you face are much more heartbreaking than the enjoyment you get from receiving dividends. If you have around $10,000 dollars leftover, split them into four groups and invest each portion into four different blue-chip companies of different industries. This is called diversifying your portfolio which helps balance the difference between a loss in an industry with the gains from another.
High-Interest Checking Accounts
These bank accounts are mainly offered by online banks. They are a great short-term investment since they offer abnormally high-interest rates compared to normal checking accounts. In addition, these accounts help students save money by applying lower or no overdraft charges, as well as no ATM transaction costs or monthly fees.
High-interest checking accounts work pretty much like normal checking accounts in which you are still given the freedom to withdraw and deposit funds which are guaranteed by FDIC insurance. The main difference is the bank where you leave your cash – they have limited brick-and-mortar locations so most of your business will be done via electronic channels. However, debit cards and paper checks can be given for a fee.
Starting Your Own Small Business
Depending on where you live in the world, there may be certain laws in place to protect both the public and the entrepreneur from unforeseen risks when running a self-established business. Most students lean towards establishing a business in the food and beverage industry since the barrier to entry is relatively low and returns can be tremendous if everything is done right.
This requires a bit of capital to get started, and you might need to sacrifice a few hours to get your business running in the beginning. This means you’re focusing more of your time running the business than you are focusing on school. The benefits of the tradeoff depend on how invested you are in the business and how long you are willing to postpone graduation.
Students should spend whatever leftover time they have by working. If possible, find a company that offers a 401(k) where you can invest in. The funds you invest are pre-tax, meaning that you won’t pay any taxes on the earnings you make until you withdraw from the account. The best thing is that employers may match a portion of your deposits. If you get this special offer from your employer, do whatever you can to deposit at least that amount, otherwise it’s like you’re refusing free cash.
401(k)s are designed to be withdrawn only in the event of retirement, so be careful with how much you deposit into the account. You don’t want to invest any money you need to survive the week/month since, in most cases, withdraws made before reaching 60 years of age will result in heavy fines and taxes.
As a student, you’re most likely focused on school and trying whatever you can to have a social life (which is an investment itself). If you have leftover cash but no time to sit in front of a computer and stare at the fluctuations of the stock market, it’d be better for you to hire expert services to manage your funds.
Essentially, you give authority to a fund manager to take control of a certain amount of money to invest with. The fund manager collects a sum of money from people who don’t have the time or knowledge to invest and uses that money to buy and sell assets on your behalf. In the end, you and the other clients will receive payments periodically based on how the investment decision worked out (minus a service fee, of course).
Certificate of Deposit
A certificate of deposit is also FDIC-insured. You can open a CD via online channels with your bank. This is a form of short-term investment which locks up a sum of money for the term of the account. Once again, do not invest money that you need to pay for food, housing, clothing, books, etc.
With a CD, you’re agreeing to surrender an amount of money to the bank for a fixed period of time, usually lasting between three months and five years. In exchange, your investment will appreciate in value with the applied interest rate. In general, the longer the term, the higher the interest rate. However, pay attention to the clauses of withdrawing money before the term is up – many banks will impose heavy fines on withdrawn funds.
If you’re worried about investing a sum of money that you may need in the near future, you can ladder your CDs. Laddering refers to splitting up a sum of money and opening CDs of different terms. For example, 1/3 of your cash goes into a 6-month CD, another third goes into a 1-year CD, and the final third goes into a 3-year CD.