Investing Tips for College Students? 740
GenKreton asks: "I am a rising junior in college and decided to take out loans to cover all my costs so I could graduate with money in the bank. My tuition bill is minimal as I have a nearly full ride, but living is always expensive. With that said, I feel like my thousands sitting in the bank could be doing work for me instead of collecting dust till the day I graduate. I have been researching how I could best invest my money so I have immediate access to it if needed, but still do better than a mere savings account. There seems to be a lot of mixed advice and some obvious scams out there. So I ask Slashdot, what is the best plan for a college student to do with his money?"
Talk to the pros (Score:4, Insightful)
Go ask a financial professional. There are tons that give free first time consultations.
Pay down any credit or loans. (Score:5, Insightful)
Loan type? Interest rate? Payoff schedule? (Score:5, Insightful)
The biggest issue in my mind is that by taking out loans, you now owe interest. Depending on what kind of loans they are, the interest rates, and the repayment schedules, this may not be the best thing to do. In the long term, unless you're able to achieve a higher rate of return on any investment you find, you'll be losing money.
If you financial situation is stable, and you have some sort of fallback plan (i.e. family), or you can look forward to finding a good job when you graduate, the best thing to do may be to just pay off those loans right now.
Short term deposit could be good... (Score:3, Insightful)
Hope the above helps and I can provide more accurate advice if you need. Also time for a new acronym...I Am A Investment Geek Though My Advice Has No Warranty So Don't Sue Me If You Fuck Up...IAAIGTMAHNWSDSMIYFU
Get out of debt (Score:5, Insightful)
Then you borrowed money to invest and you don't even know how to invest. Think about that for another minute.
Give the money back to the bank, pay your stupid tax, and go to DaveRamsey.com and get My Total Money Makeover and learn how to use money.
Or, continue to be financially brainless and wander around borrowing money for no good reason and wonder why you retire broke and bitch about Social Insecurity.
Not rocket science (Score:4, Insightful)
One concept I've heard of that I liked combines liquidity (access to money) with a high return. Say you've got $5000 you can put away. Divide it by five and put $1000 each into a 1-, 2-, 3-, 4- and 5-year Certificate of Deposit (CD). At the end of the first year, when the first CD matures, roll that into a 5-year CD. (The longer the time, the higher the interest rate is you earn, usually). Lather, rinse, repeat. Every year, 20% of your investment becomes available without penalty and you're earning a high rate of return on your money due to the longer term and interest rate averaging over the time period.
That, or find a financial advisor you can trust. A good one will value your relationship and look forward to making you money for many years. A bad one will want you to trade stuff in your account often (earning them high commissions) and leaving you in the poorhouse.
That, or invest in mutual funds that cover a lot of type of investments: some index funds, some international/European funds, a few bonds here and there. It's very easy to avoid scams and beat your savings account rate. Optimizing that is what is a bit trickier.
What a crock of self-important crap (Score:3, Insightful)
Secondly, get in touch with reality. College is hard work... I have learned that you don't go to college for money. You go to college to learn. With that learning (not just academically, but about life in general) you learn that life does not come delivered to you on a silver plate. *Most* college students have loans. Unless you're some rich trouser stain who doesn't have you be bothered by reality (i.e. the submitter) you'll probably be working shit jobs at a shit wage living in a shit apartment trying to get your degree.
This sense of entitlement is beyond infuriating. I experienced this kind of crap in college all the time. Life does not owe you anything and there is a high likelihood you'll be in debt. Just be happy that it is another day and leave it at that.
Re:Believe it or not it's illegal (Score:2, Insightful)
Re:Live frugally first! (Score:2, Insightful)
I would think the obvious recommendation for this person would be a FDIC insured money market account, and if he's got a little extra, perhaps some short term CDs.
That said, most advisors would tell you to pay off your loans first, as that is equivalent to a guaranteed return of wahtever your loan rate is, vice the the certainly paltry return of a money market. HOWEVER, you still want ready savings for emergencies, and an "investment" in paying off your loan cannot be taken back out.
So, I'd figure what you need for an emergency fund, put it in an insured money market, and pay off the loans with the rest.
My Advice (Score:5, Insightful)
Here's some brief advice based on my own experiences... I don't have the willpower to go into lengthy explanations for each point, so the first thing that I can recommend is that you start by doing some background reading. (Also, I'm skipping all of the mundane advice like "live frugally" because you've probably heard most of it before, and you want a non-bullshit answer.)
0) Pick up the "Intelligent Investor" by Graham, revised edition with commentary by Zweig. Then, read everything at: http://www.bylo.org./ [www.bylo.org] When done, read everything at: http://www.ndir.com./ [www.ndir.com] Once you have established this basis, you will probably understand & agree with my following comments more closely.
1) Pay off your debts first. Do not invest money while you still have debt -- paying off a 19.75% credit card balance will reap you more money than any average investment. Let me repeat that, because most people are retards and don't get this point. Do not put a cent of money into a mutual fund or stock until your debt level equals $0.00. Capiche?
2) Open an ING Direct savings account. It's free, it pays high interest, and it's secure. (I've been a customer with the Canadian version of ING Direct for more than 7 years.) Keep your spare cash there. This includes any money that you make on co-op work terms (or summer jobs, etc.).
3) Build up a sufficient supply of cash in your ING account -- enough to pay for the next 2-4 terms (or whatever you feel comfortable with). This is your "margin of safety" cash -- don't touch it. It's used in the event that you lose your job, crash your car, etc.
4) At this point, you have no debt, and you have reached your "margin of safety" amount. Once you have built up an additional $3k to $5k on top of your margin of safety, open up a discount brokerage account (e.g., E-Trade).
5) Now, start to build a "couch potato portfolio". Buy an S&P500 ETF (called a "SPY"der, in the States) from iUnits/iShares. (I recommend waiting until you have $3k to $5k to minimize the effect of brokerage commissions, as a percentage of the amount invested.)
6) Every subsequent $3k to $5k that you save is then used to build up a diversified portfolio of (a total of) 3 or 4 ETFs covering the S&P500, the NASDAQ, MSCI EAFE, and possibly a Japaense/European/Canadian index. Over time (as the evidence suggested at http://www.bylo.org/ [bylo.org] would suggest), your low-cost ETF portfolio will outperform a vast majority of actively-managed mutual funds, and it requires relatively little maintenance on your part. This is exactly the kind of portfolio you want to build as a student -- you want an investment platform that you can put on "cruise control" while you focus on more important things (like studying, partying, getting a girlfriend/boyfriend, etc.).
By the time you're ready to move on to more advanced stock/bond investing, you will probably know that there are better forums for these kinds of questions, and you will go there. Good luck.
Re:Percentages are misleading... (Score:3, Insightful)
For university students the first thing is to live frugally, the next thing is to pay off debts and the third thing is to save.
Re:Get out of debt (Score:5, Insightful)
1) My loans aren't gaining interest now, the federal government is handling that for me.
2) I want options when I graduate to move to where I need to or whatever. I don't want to live in my parents' basement till I am 35.
Re:Live frugally first! (Score:5, Insightful)
Don't forget, with loans, you are going to come out of school with debt. Why not plan to have some cash on hand to start paying that off early? Trust me, paying that debt off should be priority #1.
Going back to point #1 - I will say that this applies to just about anyone. If you have reserve cash - hang on to it, you never know if you will need it in a snap. To many of my friends had a glob of cash from different things (insurance payoffs, VC money, loans money) and spent it too fast, and found themselves high and dry when it counted.
RonB
Fuck You (Score:1, Insightful)
Risk/investment horizon (Score:2, Insightful)
As others have suggested, it's always a good idea to get professional advice. I'd add that no matter how good the advice you get, it's still your responsibility to make the investment decisions. So you also need to do your own research. You'll probably make mistakes at the begining. But any investment mistakes you make at this point in your life are probably smaller and easier to deal with than if you wait and start investing later in life.
One source I'd recommend is to read the works of Benjamin Graham http://en.wikipedia.org/wiki/Benjamin_Graham [wikipedia.org]. He's considered the "Father of Value Investing". His analysis of areas such as the conditions that triggered the great depression and "investing" versus "speculating" are a great read.
Best of luck!
Re:Talk to the pros (Score:2, Insightful)
Don't put it in stocks or stock funds (Score:5, Insightful)
This loan money is money you're going to need to repay in a fairly short time, right? The stock market is volatile. When you need the money a year or two years from now, the stock market could be way up from where it is now. It could also be down--possibly by 25% or more. And that's just the market indices. If you invest in individual stocks, rather than index funds or other diversified mutual funds, your investment's value could fluctuate even more.
Better options:
Finally: have you thought about the ethics of using your student loans in this way? Were the loans given to you in order to help you pay for your expenses as a student? Do you think it's okay to ask someone to loan you money for one thing and then use that money for something else? Isn't that a form of lying?
Re:Don't put it in stocks or stock funds (Score:2, Insightful)
Somebody mod this up. I have points, but have already posted in this discussion.
Re:Don't put it in stocks or stock funds (Score:2, Insightful)
Re:Get out of debt (Score:4, Insightful)
Your parents basement is better than the federal pen.
If you learn how to budget and live beneath your means, then you will not live with your parents unless you are just afraid of work.
Loans represent risk. Unmanaged money leaves.
99% of people in your situation blow the money they didn't need and then end up paying back the student loan over 20 years. Oh, and Student Loan rates are now 7%. It's too late to consolidate at the 4.whatever rate that was the second lowest in history back in June.
Go read the Millionaire next door. Millionaires don't borrow money. The middle class borrows money.
Re:Fuck You (Score:2, Insightful)
Re:Fuck You (Score:1, Insightful)
Re:Get out of debt (Score:5, Insightful)
2) I want options when I graduate to move to where I need to or whatever. I don't want to live in my parents' basement till I am 35.
When I graduated from college I got a job and moved out of my parents' house in 6 months. If I understand you correctly:
1) You're borrowing money you don't need from the taxpayers so you won't have to do that, and
2) You're asking those same people to tell you how to make more money.
Suck it.
Re:Investing loan money (Score:2, Insightful)
1) As you point out, the federal government is paying the interest on your loans. That means the bill is being footed by US citizens(people like me). The loans are provided to pay your educational expenses, and investing is not really an educational expense.
2) There is nothing wrong with investing the money wisely while you have it. You should do it in a way that is not risky and leaves the money accessible. I'd use a money market account. If you're lazy, go set up a paypal money market account, if you want security go to a local bank or credit union.
Going back to point one, if you're taking out loans in considerable excess of what you are using for college expenses each semester and hoarding the cash (whether invested or not), you're either breaking the law, breaking the contract on the loan, or simply venturing into the cold land of ethically questionable behavior.
Re:Don't put it in stocks or stock funds (Score:3, Insightful)
Also keep in mind that money market funds can go down. Say you buy one that represents a selection of normally reliable stocks and then the stock market declines as a whole (like it has been recently). Money market funds are generally a good choice, but you still have to consider overall market behavior if you aren't interested in long-term investing.
Six-month Treasury bills or a two-year Treasury note.
Threasury bonds are generally the way to go. They have a set amount of interest (which is typically higher than you'll get from a savings account or CD), and price fluctuations are so small as to be insignificant for the average investor. Because of how yields are figured they're generally a better buy when you think interest rates will be declining, but for normal investing this doesn't matter too much.
Pay back the loan
Definately. Investing with borrowed money is only advisable if your return will be higher than the interest you owe on the loan. For student loans that probably going to be the case, but it's worth keeping in mind. Carrying debt that can be paid off is rarely a good idea.
Finally: have you thought about the ethics of using your student loans in this way? Were the loans given to you in order to help you pay for your expenses as a student? Do you think it's okay to ask someone to loan you money for one thing and then use that money for something else?
Not to mention the fact that it screws other students who actually need the money, because that money supply isn't infinite.
Re:Get out of debt (Score:3, Insightful)
If you absolutely must have the money set aside for something, just put it in a savings account that's FDIC insured and leave it alone.
Re:Get out of debt (Score:3, Insightful)
Get a part-time job during classes, get a summer job for the 2-4 months you have off. If you live in your parents' basement, your expenses should be practically nil. I did the same thing and came out of school with thousands of dollars in the bank, and I didn't have to cheat the system to pay for it.
Besides, on the less harsh side: nothing, and I do mean NOTHING is as satisfying as not owing a single red cent to anyone on graduation day (except eternal gratitude to the folks, of course
Re:My Advice (Score:3, Insightful)
Firstly, I don't think a savings account is particularly good at its stated purpose. Given that you don't intend to need the money in the account at the drop of a hat, you could put the same amount in a money market fund (low to no commission if you go directly through the provider) and earn a couple points more per year. The downside would be that if you want to get the money out with low transaction costs, you'll have to wait 3 business days for it to clear from the fund back to your checking account. So for the cost of liquidity, you'll earn significantly more in an extremely safe investment.
Secondly, while you should pay back all your high interest debt as soon as possible, as a student you may have loans at a fixed rate below the current short term interest rate. Don't pay that off right away. If you owe $1000 at 3%, and you can get 5% in, say, VMMXX, then you're better off just paying the minimum on the debt and earning the interest with the rest of your savings.
Finally, I wouldn't say an SPX ETF is a particularly safe investment, especially in the current environment. If the submitter's time horizon is less than say 5 years, he should steer clear of even the S&P. If he's saving for the long term, on the other hand, he should take bigger risks, since he cares less about near term drawdowns. If he's investing in 3-5K chunks, it might be a little difficult to diversify meaningfully with ETFs or mutual funds, anyway.
Now is the best time to invest! (Score:2, Insightful)
1. Weapons companies.
2. Security and surveillance companies.
3. Drug companies.
4. Alcohol, Tabacco and Firearms companies.
5. Datamining companies.
6. Cosmetics
This is just 5 examples. The point is, you should invest based on the emotions of the current society and population. People have chosen death, misery, pain, through all sorts of different means. Some are smoking tabacco, some are alcoholics, some are gamblers, but the key to success in investing is to profit from human vices, and from popular emotions.
Example, when racism increases, it helps the cosmetics industry. When obesity and weight becomes the new race, it helps the dieting and supplement industry. Both of these help the bio-tech industry, and genetics, stem cell research and other related fields, in the future will profit from cosmetics.
Example #2, Disease, expect the avian flu, madcow disease, cancer and heart disease to become more popular and bet on the companies which treat but do not cure the disease. Once again related to stem cell research which certainly could cure the disease but wont.
It's also safe to assume, that if the world ignoance/homophobia level stays the same as it is today, homosexualiy will eventually be declared a disease, and there might eventually be a drug which can cure it. This would be a drug to invest in if it's ever released in the same way that viagra was a drug to invest in when it was released, or the breast implant. In the future there might be a pill which can make breasts large or small, turn skin from white to black and back to white again, and all sorts of other cosmetic things which now surgery is required for. If this happens, it makes sense to invest.
Never bet against human nature. Always bet on humans to remain self destructive and ignorant, thats the secret to profit. Expect a future with even more homophobia, racism, sexism, agism, and other isms, and expect the hate industry to merge with the drug industry.
And inflation... (Score:2, Insightful)
after 10 years, you have $2.60
after 20 years, you have $6.70
after 40 years, you have $45
after 55 years, you have $190
Keep in mind that inflation seems to end up around a factor of 10 over 25-30 years. So, in 55 years you have $190 which is roughly $1.90 in present money for every dollar you invest now.
Allow me to put it in to terms that make sense to a typical male, slashdot-reading, college student:
At the strip club, $40 will get you two lap dances now or three lap dances and a beer when you're 75. On the other hand, should you die at 60, you get the choice of two lap dances before you die or none at all if you wisely invested.
At the end of the day, investing pays the salaries of the people who do the investing for you, makes the very best investors very rich, is a gamble for most, and a good way to not really do much beyond keep up with long term inflation plus a little bit for those who want to play it safe.
Another more boring suggestion: Spend $1,000 on presentation skills classes. Spend $1,000 on a great suit that gives you the confidence of knowing you look the part. Spend $250 on getting a professional to help you with your resume when you graduate. Then sail through the interview for a job paying $5,000-10,000 more every year than you would have got otherwise. As your career continues to build from there, compounding over time, there aren't many better investments you can make. I don't know of many other investments that can pay five times over the initial investment every single year.
Re:Percentages are misleading... (Score:3, Insightful)
What you should be saying here is "the entire time I've been watching, real estate has had a good return". Talk to someone who was active in real estate during 1989 (which has an uncanny resemblance to real estate action in 2006) about that lovely time and come back to me. There's a great little chronicle of that based just on the headlines of California newspapers at
http://www.rntl.net/history_of_a_housing_bubble.h
KingKong's post... (Score:5, Insightful)
I also agree it's probably going to take another few years before stocks are a good investment - say, 2012-2015 - and we're going to need a major market dump before that happens. As one market analyst remarked some 30 years ago "You can't breathe in all the time; at some point, you have to exhale". It's just so with markets - the cycles the poster above referred to are the result of new technologies changing societies and markets, and then a sort of 'resting period' while they digest all those changes. The bull market from 1916-1929? Society was investing in cars, telephones, and radio. A bear market while that was digested. The bull market from 1949-1966? Television, jet travel, mainframe computing. Then a pause from 1966 to 1982 while they were digested. The bull market from 1982 to 2000? PC's, internet, cheap telecoms, broadband cable, etc., etc. We're still digesting those changes.
My guess is the next boom will be fueled by major advances in biotechnology, natural language speech recognition and synthesis, and, of course, pr0n and anally implanted RFID's.
Financial Advice (Score:2, Insightful)
Re:Don't put it in stocks or stock funds (Score:2, Insightful)
Aim for stability (Score:3, Insightful)
Basically, since you're dealing with a short term investment, you want to aim for stability, but since a student's financial situation is also topsy-turvy, you want flexibility too. With that you really have a limited set of options. Here are the four best, in order from lowest return to highest:
1) conventional savings account -- maximum flexibility, minimal return.
2) high-yield savings -- something like an ING Orange account, which places minimal limits on transactions, is FDIC-backed, and has a respectable interest rate compared to a regular savings account.
3) money market account -- not federally insured, but higher returns and most let you make a few withdrawals without penalty, so you can get at some of your money if you need it earlier than planned.
4) certificate of deposit -- returns at about the same level or slightly better than the money market option, but your money is locked in for the length of the CD, unless you want to pay a hefty penalty. This is your best option though if you know for sure that you won't need the money until a given time.
Realize that all four aren't exactly lucrative options... right now the max you'd probably get is between 4.5 to 7% interest on the latter two options. And the savings account option is barely an investment in terms of return... I get a paltry 0.55% on my savings, but hey, it's stable and I can get at my cash whenever I want.
I noticed alot of people were critical of trying to invest while taking out student loans. As long as you're not taking out the loans for purposes of investing them, there is nothing wrong with what you're doing. The federal financial aid process is designed to take into account your existing assets and projected earnings during the school year you are receiving a loan for. If you already have or earn funds that you would like to invest, there is really no restriction on this, so long as you can prove that the balance of your loans was applied to legitimate educational and living expenses as defined in the terms of your loan.
I also fail to see why some people consider the possibility of investing while taking out student loans to be illogical or unethical. It's financially prudent to at least retain a reasonable sum of reserve funds at all times, especially if you know you will need that money later, for when you can't rely on loans to help cover your expenses. It's really just a question of finding a reasonable balance between holding on to money now and saving yourself from later costs from interest on your loans.
To those who think it's unethical to retain funds in a sound investment while taking out taxpayer-backed loans, it's quite clear that these people don't understand the basics of how loans work. When you buy a house and get a federally-backed loan, they don't expect you to empty your entire checking and savings account, 401k, and kids' college fund before giving you the loan. That would obviously be counterproductive, as you'd simply manage to send the person careening into an instant bankruptcy. So why should you have to completely bankrupt yourself to pay for your education? Clearly anyone who makes such a criticism does not understand basics of how things like student loans, credit and mortgages work--and clearly you shouldn't listen to their advice!
And BTW, "federally backed" loans does not mean taxpayer funded for the most part. The system of loan guarantees is funded with seed money from the federal government--thus from the taxpayers--but once the money is placed in the system, it is recycled into new loans over and over again, and the default rate is sufficiently low so as not to trigger growth in the federal inputs into
Re:Get out of debt (Score:2, Insightful)
Millionaires don't borrow money?!
Come on. Millionaires leverage debt to great advantage, especially those who are small business owners (a goodly number, as you know from reading "The Millionaire Next Door"). Make any argument you want against borrowing, but not that one.
The trick is knowing the difference between smart debt and dumb debt, and that starts with asking the question. At least the submitter is doing that, and that in my mind puts him/her ahead of 90% of the populace who blindly rack up credit card debt, oblivious to their financial future.
Re:Live frugally first! (Score:4, Insightful)
Because you don't really own it if you have even a single cent of debt. Remember, the debtor's property rights trump yours. What's worse, you can't simply walk out from debt, while you can walk out from a rented apartment - which means that if you become unemployed, or need to move somewhere else (to get a new job, for example) you are in it deep.
Never take any debt if you can avoid it; always pay with cash; if you can't pay with cash, ask yourself if you really need the thing right now. Debt is a risk - you may not be able to pay it back - and a shackle - you must keep on paying it until it's all paid out. Paying with cash means that you have less opportunities for investments, since you don't have as much available cash; but it also means that you have much more freedom to act in unexpected circumstances.
Add to the above the concepts "interest" and "interest on interest" and it's clear that debt is not worth the risk. And if you still need further prove, consider this: Why did your debtor lend the money to you ? Surely, if you can invest the money in ways that exceed the interest of the debt, he could as well. This is an especially good question when the debtor is a bank or some other financial institution which can consult financial experts; you are not likely to know better than they do.
To GenKreton: Taking loan to save your own money was stupid. Loans must be paid back with interest. You'd been better off living out of your own money and only borrowing money if you actually needed it.
The people who sell the houses are presumably making a profit as well, and a greater one than if they simply rented them out. Either that or they are doing it from the goodness of their hearts, which, since they are usually corporations and therefore have no heart, is not very likely.
Re:Don't assume real estate is the way to go (Score:3, Insightful)
The question is, can the guarantine it ?
Actually, increased child mortality tends to increase, not decrease, the population growth rate. The reason is that people will make more of them to make sure that at least one survives until adulthood. This, in turn, means that there's going to be a huge housing boom in the future - the larger families need bigger houses, and once the children have grown, they too need homes.
And don't forget the inevitable flight to the countryside that starts when the superbug starts spreading.
IMHO giving in to such demands should be a capital offense, as should not taking the whole prescription of antibiotics, since both endanger every human in the planet.
And, just to clarify: I don't think people should be forced to take antibiotics, but if they begin taking an antibiotic prescription, they do have an obligation to take it to the finish, since doing otherwise endangers other people's lives. In other words, you can do it or don't, but you can't leave it half-finished.
Re:Live frugally first! (Score:1, Insightful)
I disagree-- junior year of college is a great time to be risky. I say take all that money and put it in an online brokerage account and play with it for a year. At graduation, if you made more than 5% or 6% you've done well plus you've gained great investing experience for when you have some real capital. If you lost money, oh well, that's why you're getting that college degree.
the little things (Score:1, Insightful)
Not so fast (Score:3, Insightful)
So assuming that you are 20 and retiring at 75, every dollar you invest now is about $200 at retirement (or, seen another way it is $20 per year at retirement)
Considering the state of the US economy, the demographics of the US population (hint: it's aging fast) and, perhaps most important to this discussion, this publication [stlouisfed.org] (warning: .pdf) by the St. Louis Federal Reserve Bank [stlouisfed.org], that $200US at retirement might have the same purchasing power as that $1US now.
YMMV.
--The usual disclaimers apply
Re:Don't put it in stocks or stock funds (Score:2, Insightful)
As far as investments go I know that in Canada we have some funds that are effectively saving accounts (your principle is protected) that pay as much as 4.5%. If you decide to invest using funds be sure you understand what an MER and load are and how they can impact your returns.
Re:Live frugally first! (Score:3, Insightful)
There is no reason to pay them off any faster than required, even if you have the money.
If you don't wnat to be shackled by it, you should try to have enough money to pay it off whenever you want,
but that doesn't mean you should, pay it off.
Re:Live frugally first! (Score:2, Insightful)
As for whether it is stupid to take out a loan and invest, the answer is: of course not! This is what people do all the time. Buying stock on margin, getting a home improvement loan to invest in your home value, or simply buying something with a 0% interest credit card and leaving your money in a CD or something... these are all good ideas. But only if a) the return of the investment is higher than the interest rate of the loan, and b) you can afford to lose money in the investment and still cover your debt in a reasonable fashion.
As a corollary, if you're paying extra money on your 2.9% car loan when you're sitting around with a 7.99% credit card debt piling up, that's a bad idea. Don't laugh; I've seen people do this.