It’s safe to say that college students and twenty-somethings understand the stress of a $25 night-out that can feel like a stretch for your savings account. It’s stressful trying to manage rent, food, tuition, unspeakable student loans and God-forbid a concert or item of clothing every once in a while. Amid the current volatile political climate, the skyrocketing costs of college tuition and ever-increasing housing prices, being responsible with money has become a heightened necessity for college students.
Understanding how to handle money and grow it over time can be not only exciting and empowering, but may help you achieve financial stability throughout your life. How can you get to the financial-comfort levels of buying vodka sauce, Lush products or whatever else is your not-so-frugal pleasure?
Seattle U’s Finance Professor Peter Brous said that, for college students, saving should start now. You need to think about this now. Almost all who are well-versed in finance seem to repeat the phrase “start young” when talking about saving. Brous calls this the power of compounding.
“Put some money in a location where it can’t be touched,” Brous said. “You can even get it taken directly out of your pay at work so you never see it…force yourself to save.”
I know what you’re thinking. I’ve barely started any semblance of a career and I’m supposed to be thinking about old age and retirement money? Yes. A brilliant place to start saving for your future is in a Roth IRA. The only taxes on money that you put into this type of retirement fund is based on your income currently, so basically nothing. You can add as much to it as you can manage and it will continue to compound and compound so that by the time you’re 60 and can take it out, you can buy all the Lush products and vodka sauce the world can make.
Saving is vital. Yet, there are ways to get more immediate results that are worth investing time in learning about. Understanding the world of stocks, bonds, and funds can be a life-changing way to make extra money throughout your life.
Take notes from Seattle U Finance and Business Analytics major, Robert Horenstein. He’s been saving and investing since he was 13, when his grandpa helped him invest in a Nike stock and his parents made him start a retirement account. Now, seven years later, he has developed his methods for smart investing.
“Don’t try to beat the market,” said Horenstein, referring to himself as a risk-averse investor. “Go for what doesn’t have the highest returns but is consistent.”
What Horenstein is advising is to invest in index funds. These are passively managed funds which means financial managers don’t guess which stocks will outperform others, but they distribute your money exactly as the S&P 500 does. By owning a small piece of 500 different stocks, index funds are incredibly low risk. Some of those stocks may fail, some may succeed, but by having a diverse collection of stocks you as the investor will never lose substantial amounts of money.
The other option is mutual funds. These are actively managed, meaning financial managers will use different personal strategies to try to predict which stocks will outperform the market. Due to the unpredictable nature of guessing and of human error, mutual funds are much higher risk. The benefit of mutual funds is the chance of much higher rewards, since a financial manager may guess correctly and increase your money dramatically.
“Higher risk is not worth the potential of higher return,” said Brous, who advocates for low-risk investments and a well diverse portfolio like Horenstein does.
Recent evidence supports their stance as studies have shown that in the long run, mutual funds don’t perform any better than index funds.
“Risk tolerance is different for every person,” Horenstein said. “You have to know what you’re willing to risk. Never invest what you’re not willing to lose.”
Also, financial managers charge you fees. Those fees are much higher on mutual funds than on index funds. Horenstein said mutual funds can have fees of up to 1.5 percent while index funds are as low as 1/10th of a percent. While 1.5 percent may not sound substantial, as your money grows that number will loom larger and larger.
Both Brous and Horenstein said that avoiding fees is key. While choosing index funds over mutual is one way to avoid fees, another is thinking about transaction fees. This is not only for investing, this is also for all major life purchases such as cars.
“Don’t trade often, sell back, and then buy again,” Brous said, warning that transaction fees add up enormously over time and result in constant profit losses.
Horenstein said the market is unusually turbulent right now. He expressed an opinion about why the market is difficult to predict in modern times, crediting the erratic and tense political scene.
“We are currently experiencing unusual volatility, the most volatile ever,” Horestein said. “It’s unorganized. Things are not communicated well to the public, no one knows whats going on.”
With the widespread, arguably world-wide, fear about politics right now and the result of unpredictability in the market, being an independent investor and a financially savvy person is more difficult than ever. Yet at this age, it is more important than ever to try.
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