I met Robert from The College Investor at Fincon 13 this Fall. My first thought on seeing his badge showing the name of his blog was that it was about how to invest FOR college, not IN college. I spent essentially my entire 20s in school, and I confess I didn’t do much investing, at least in a classic sense, while I was in school, mostly because I was either broke or worse than broke most of the time. Then I got to thinking about some of the implications of investing as a student, and I think there are a lot of interesting advantages that a college investor may have.
Time Is On Your Side
The biggest benefit to investing while still in college is that you have a ton of time ahead of you. One of the biggest disadvantages many physicians (my usual audience) have is the lost decade. Doctors don’t start making any money until their mid 30s, so they often miss out on 10+ years of compound interest. A college-age investor not only has more time for retirement savings to compound, but investing mistakes hurt so much less when you have more time to make up for them. This allows you to take on more risk and hopefully, be compensated for taking it.
A Fantastic Guaranteed Investment
One of the best “investments” out there is paying off high-interest loans. These include not only consumer loans such as credit cards, but also student loans. Avoiding loans is no different than paying them off. If you can avoid taking out a student loan (which can be as high as 8% as a graduate student), that’s a far better return than you’re going to get from most fixed income investments these days. A guaranteed 5 or 6% return may be much better than a possible 8% return in the market. College students can avoid loans by living cheaply and choosing an inexpensive school to attend. Remember that credit cards aren’t for credit, they’re for convenience. Never carry a balance on them. Don’t get an expensive car, especially on credit. I assure you it is far better to “be poor” when you’re young than when you’re old.
Students don’t pay much in taxes due to their low income. You can take advantage of this in multiple ways. Unlike a more well-to-do investor, there is little tax cost involved in using taxable investment accounts. In fact, with low enough income, it can even make sense to “tax-gain harvest”, where you increase the basis of your investments each year for free, lowering future capital gains taxes. You also get to use tax-inefficient investments like REITs and high-yield bonds without having to worry about the tax implications. Although I don’t recommend market-timing and individual security selection as a long-term investment strategy, at least the costs of doing so are less due to your low tax rates.
If you are working and actively saving for retirement, after-tax accounts like a Roth IRA are a fantastic option. You basically pay no taxes now due to your low income, the money grows tax-free for decades, and then it comes out tax-free in retirement.
Dabbling In Real Estate
College may also be a great time to begin a real estate investing career. Many students (sometimes in cooperation with their parents) buy a house instead of renting an apartment, then subsequently rent out rooms in the house to roommates. Rent collected may cover not only the mortgage, but all of your expenses and even provide additional income! You also get to control your living environment and roommates. Once you finish college, you can either sell the house and use any capital gains as a down payment on your first home, or you can hold on to it as your first income property. Since you first bought the property as an “owner occupied” home, you probably qualified for inexpensive financing that will further boost returns down the road. You can learn a lot about home maintenance, being a landlord, and successful real estate investing during 4 years of college.
Investing In Yourself
Although I didn’t really start investing much until I was in my 30s, one of the best investments I ever made was in my own education. Choosing an educational path that led to a highly paid job has made all the difference now in how much I can invest each month. While your college major will never have perfect correlation with your future income, there’s no doubt that some majors are more likely to result in highly paid jobs than others. In the early years of your investing career the primary factor that affects your ultimate bottom line is how much money you can save each year. I assure you it is far easier to save and invest $20-30K a year when you’re making $100K than when you’re making $50K. Choose a major wisely, study hard, and prepare yourself for a career you will enjoy, but also that will provide a good living now and sufficient funds to purchase financial freedom later.
Have you invested in any of these ways while you were in school? Or do you wish you had?
James M. Dahle, MD blogs as The White Coat Investor at http://whitecoatinvestor.com, where he tries to give high-income professionals a “fair shake” on Wall Street.