College Connect: How and when to invest while in college

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Many college students have loans, bills and unexpected expenses around every corner. So it might seem silly to start investing, and in some cases it is. Loans and utilities might seem more pressing than retirement, but there are a lot of advantages to getting a head start even if you have some debts outstanding.

When should money be used to pay off debt versus invested?

The main issue here is the rate of interest on a given loan or investment. If you have a student loan with an extremely low interest rate, investing may be the way to go.

As a general rule, avoiding interest on debt is just as valuable as investing. For example, if you have a loan with a 10% interest rate and you pay it off before that 10 percent accrues, you saved yourself $100. It’s not technically a return, but avoiding interest can be, at times, just as valuable as getting a really great return in a mutual fund or other investment. But be careful. If you have loans with a 7 percent interest rate, which is just under what you could expect to receive by investing in the market, it’s probably a good idea to err on the safe side and pay off the debt

Can investments be used as an emergency fund?

In general, it’s a good idea to keep an emergency fund of 3-6 months of expenses, but college students aren’t normally at risk of unexpected unemployment. So keeping most or all of an emergency fund in investments can be a viable option. When set up properly, money in an investment account can be accessed within about 48 hours.

By keeping investments in a mutual fund, it is easy to redeem them at their current value at any time. However, there are a few points to keep in mind.

  1. Using an investment as an emergency fund is only beneficial if it is rarely used. Dipping into your investments more than once or twice a year will generate substantial fees and make you so susceptible to short-term trends in the market that it would likely make more sense to simply have a savings account.
  2. Mutual funds are probably your best option, as retrieving money from index funds, individual stocks and other investments is more difficult to do in the short-term.
  3. This account will need to be separate from any retirement or other tax-deferred accounts. The tax penalties you would suffer pulling money out of a retirement account would be onerous.
  4. You should always check with your bank or broker to see how long it will take you to retrieve your money in an emergency. All financial institutions are different, and some may take longer than others. Make sure that it is a time frame you are comfortable with. Ideally, this would be 1-2 business days.

Why invest in college?

You will never have another chance to get returns like this, especially for retirement. Assuming an 8 percent annual return on investment, every $1 you invest when you are 20 will be worth $32 when you are 65. And 8 percent might be low-balling it. The average return in the market from 1955 to 2000 was about 13 percent. At 13 percent that $32 turns into $245. Now that doesn’t take inflation into account, but even with inflation, the return is huge.

Investing can also help you take advantage of returns for short-term purchases like updating electronics. For example, as little as $4,000 with an 8 percent return will accrue enough interest to pay for a new $1,000 laptop every three years.

Compound interest is a powerful tool, and the sooner it is utilized, the more powerful it is.



Investopedia, “Top 5 Budgeting Questions Answered”

CNN, “Ultimate guide to Retirement”

Forbes, “Formula: How Much to Put In A Retirement Account”

Moneychimp, “Compound Annual Growth Rate”


A.J. Feather is a senior broadcast major at the University of Missouri.

SABEW - Walter Cronkite School of Journalism and Mass Communication,
Arizona State University

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