Investing for college students & grads: How do you invest at 22?
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When I look back at my investing career thus far, I have only one regret: I didn't start investing sooner.
I didn't start investing until well after I graduated from college, which is not uncommon. Few college or grad school students have the money or investing know-how to get into the stock market. But if you're a student looking to get started with investing, you're probably wondering which investments to buy.
We've broken down a few ideas for investing that can help you get set up for financial security.
1. Retirement accounts
While retirement might be the furthest thing from your mind if you're a 22-year-old college student, you can never start investing too early for your golden years.
Don't know what a retirement plan is? No problem.
If you're a college student who is also working part or full time, the first thing you want to do is see if your employer offers a retirement plan. This will usually be in the form of a 401(k) or 403(b). Each company can put different restrictions around who is eligible for their retirement plan and when they can start contributing. So sit down with your manager or your HR representative to find out what your options are.
Your 401(k) account (or 403(b) or 457 at some employers) is a pre-tax account. That means you don't pay any income tax on the account for your contributions, but you do pay fees when you withdraw in the future. Presumably, you'll earn less and have a lower tax rate in retirement, so that makes the 401(k) a great deal.
If you don't work as a W2 employee, you still have access to retirement accounts. They're called IRAs, which stands for individual retirement accounts. Anyone over 18 who has income can open one for themselves.
A 403(b), 401(k) or an IRA is a great place to start investing because of the length of time between your first contribution and when you'll begin to withdraw the money. If you start investing for retirement at age 20 and don't take out money until you're 60, that's 40 whole years of contribution and market gains! Hopefully, by the time you're 60, the past 40 years will have grown your investments and you'll have a nice nest egg for yourself.
There are few options with your 401(k)
You have to open your 401(k) at the investment company your employer picks. You also have access only to the investments they choose and have to pay whatever fees come with the account.
However, there is a service called Blooom that can help you make the most of your 401(k). It monitors the health of your employer-sponsored plan. It takes into account your age and risk tolerance. It removes the investments that don't make sense for you to own and identifies funds that can help you reach your ideal asset allocation. Read our Blooom review, It's worth checking out.
What happens to your 401(k) if it's time to switch jobs? When that time comes, you'll need to know how to roll over your account to the brokerage of your choice.
Roth IRA
A Roth IRA is an after-tax account. That means you pay tax when you contribute but don't have to pay any tax on withdrawals in the future. With a Roth IRA, your investments grow tax-free until you retire. That's the best deal for younger professionals with decades until retirement.
You also have an option for a traditional IRA, which is a pre-tax account like your 401(k). Pre-tax is still a good deal, but for younger people, after-tax accounts offer more advantages in most cases. That makes the Roth IRA king for new graduates.
After your full employer match in your 401(k), hitting the annual maximum in your IRA should be your biggest retirement savings priority. As with all retirement accounts, IRAs are subject to income limits and contribution limits. For 2019 and 2020, the maximum contribution for people under 50 is $6,000.
Most major brokerages in the U.S. offer IRA accounts with no monthly or annual recurring fees. Even better, most big brokers recently got rid of fees for trading stocks and exchange-traded funds (ETFs) in all accounts. (TD Ameritrade, Ally Invest, E*TRADE to name a few) That means you can buy and sell without paying any brokerage fees.
| Highlights | E*TRADE | Ally Invest | TD Ameritrade |
|---|---|---|---|
| Rating | 4.8/5 | 4.5/5 | 4.5/5 |
| Minimum investment | $0 | $0 | $0 |
| Stock trades | $0/trade | $0/trade | $0/trade |
| Options trades | $0.65/contract | $0.50/contract | $0.65/contract |
| Crypto trades | ❌ | ❌ | ❌ |
| Mutual funds | ✅ | ✅ | ✅ |
| Virtual trading | ✅ | ❌ | ✅ |
| Learn more | Visit E*TRADE | Visit Ally Invest | Visit TD Ameritrade |
| Reviews | E*TRADE review | Ally Invest review | TD Ameritrade review |
What kinds of investments should you buy through these accounts?
Opening a retirement account isn't actually investing. You still need to select a fund, bond or individual company to buy.
Making this decision is often an intimidating process. What companies will do well? Which funds have a high return? It feels especially fraught when you are a new investor without a lot of money.
What is right for you specifically is going to be a personal decision. However, one place you may want to start your investment research in is target-date funds.
Target-date funds
A target-date fund is an investment fund that automatically changes the weight of your investment as you near retirement. The farther you are from retirement, the more aggressive the fund is, which usually means it's heavily into stock. The closer you get to the retirement age, the fund gets more conservative and bond-heavy.
Simply pick the year you plan to retire as your target date. Then let the investment itself do the heavy lifting over the years. Check in on your investments periodically and make sure they're on the right track for your plans.
2. Robo-advisors
As a student, you may not have a ton of spare cash to invest. An IRA, for example, has a limit of $6,000 maximum per year (as of 2019). This may seem an impossible amount to fit into your student budget. Of course you don't have to invest the full amount; ever little bit helps.
Luckily, there are many robo-advisors to choose from. With one of these you can start investing for super low prices or even free.
A robo advisor is a type of financial advisor that works based off your financial information, goals and an algorithm. Instead of working with a human, robo advisors are web and app based tools that help you start investing and build an investment portfolio.
Since you're not paying for a human financial advisor, robo-advisors tend to be much cheaper and easier to start investing with. Many of them have no required investment minimum. So you can start with as little money as you'd like. You can contribute a different amount each month if you want, based on your budget that month.
Our recommended robo-advisors
| Robo-advisor | Fees | Min. investment | Rank | Visit | Reviews |
|---|---|---|---|---|---|
| Wealthfront | 0.25%/year | $500 | 4.5/5 | Visit Wealthfront | Wealthfront review |
| Empower | First $1 million: 0.89%; $1-3 million: 0.79%; $3-5 million: 0.69%; $5-10 million: 0.59%; Over $10 million: 0.49% | $100,000 | 4.8/5 | Visit Empower | Empower review |
| M1 | None | $0 | 4.3/5 | Visit M1 | M1 review |
3. Invest in the stock market using taxable investment brokerage account
Once you have your first two retirement accounts in place, it's time to start your non-retirement investment account. Traditional brokerage accounts allow you to buy and sell stocks, ETFs, mutual funds, bonds, and sometimes other assets.
Unlike the pre-tax and post-tax accounts above, there are no tax advantages with a traditional brokerage account. You have to pay capital gains tax on any profits, though you can offset profits with any losses you incur. But you can also buy and sell at any time with no restrictions. Tax-advantaged retirement accounts make you leave your money until you reach the government's retirement age or face tax plus penalties for early withdrawals.
The freedom and flexibility of this type of account let you grow your money with few restrictions. You have to pay taxes when you make the right call and strike it rich in the markets.
Fractional shares
Buying individual stocks can be expensive and if you're a student, chances are you don't have a lot of funds to invest. Instead of buying whole shares of a company, consider buying just a fraction of the stock.
Known as fractional shares, this is when you buy a portion of the stock for a more affordable price. You can buy fractional shares of well-known companies and learn the basics of stock investing without having to invest too much capital. So instead of buying Apple stock for $380 a share, you can buy just $20 worth of stock.
There are a number of user-friendly apps that also offer fractional shares. One of our favorites is Public.com. This investing app has no commission fees and offers shares of thousands of stocks and popular ETFs from Vanguard, Fidelity, and BlackRock. You can read more about them in our review.
4. Real estate - look outside the stock market
While we've focused here on stock market investing, you may also want to consider investing in real estate. While real estate has a much higher barrier to entry, between a down payment, closing costs, taxes and inspections, real estate can also produce much higher returns on a faster time scale than the stock market.
If you're in an area that you plan to stay in for five years (like while you get your Ph.D.!), real estate can provide both a place for you to live and an investment opportunity. Real estate markets are highly local, so don't look at national trends to understand what's going on in your town or city.
Look to your local market. Figure out what you can come up with for a down payment. Research first-time buyer programs you can participate in. And think at least five years into the future for your personal plans. Will you be around to fix a leaking roof? Do you have a property management company you can trust if you graduate early and leave?
Why investing ASAP is the smart move
Investing in the stock market is a long-term decision. Most financial experts will tell you that the market is a great place to grow wealth over decades, not weeks.
And the earlier you start, the longer your money has to grow. Your funds are more likely to weather financial turbulence caused by things like COVID-19. This is because more time means your money has longer to compound interest. The money you put in the stock market grows through both your contributions and your previously earned interest.
Not only do you have time to recover from any downs when you start investing early, but you are also more able to take advantage of times of growth in the market. From 2009 to 2020, the U.S. stock market was in a bull market. If someone sat out at that time, they missed all the good years of earnings. You can't guarantee to get back what you missed out on.
The average historical stock market return per year is 7%, not counting for inflation. Of course, that varies by year. But if you keep your money in the stock market for 20 or 30 years, that's a lot of compounded interest.
Developing the habit is more important when you are younger
Remind yourself that starting out small is ok. In fact, small is how most people start investing! Few people have $100,000 or more to get started with when they're fresh out of college. At the beginning of your investing journey, it's more about learning how to invest and developing the habit of investing.
Make investing part of your life and your budget by the time you're 25, and you'll more likely continue investing throughout the rest of your career.
On the flip side, if you keep putting off learning about investing and making room for it in your life, you lose time in the market. But then you've also mentally decided it's less of a priority and are more likely to cut investing out in the future.
Take more risk with a higher stock percentage
The best time to be more risk-friendly with investing is when you're young and just beginning to invest. Losses are a part of investing. They can be temporary, and your money will come back over time, depending on the types of investments made. Be more aggressive with your portfolio allocation when you are young. That way, you have decades in the stock market ahead of you. If you do experience losses, you have time to make them up.
Start out with a higher stock allocation rather than a bond or cash allocation. This means your investments will have a better chance at growth. Yes, it does mean there is a higher chance of volatility. But that's okay at 22!
The bottom line
Ultimately, beginning to invest early can be a great decision, if you find the right investment for your situation. Don't feel rushed to get into any market just because you think you should. Get into the markets that feel right to you long term and make sense with your current budget.
Kara Perez is a freelance personal finance writer.
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