College students: invest to help your money grow

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We’ve all heard the old adage, “A penny saved is a penny earned.”

While that may ring true according to conventional wisdom, these days, a penny merely saved is about 2 percent of a penny earned. What I’m talking about, ladies and gentlemen, is the historically low interest rates that our economy is saddled with, making it harder and harder for the average person to earn interest on their savings.

As a student, making your money grow is probably your last worry. Between paying for school, room and board, books, rent, dues for clubs and organizations you’ve joined and other miscellaneous expenses, it’s tough to have enough money left over for anything else.

Here’s the thing, though: it’s not impossible. One of the biggest misconceptions that people have about college students is that we’re supposed to be poor.

We do, however, have a couple of things on our side. We can get jobs pretty easily on campus. We have six months post-graduation to start paying off student loans. And K-State is filled with resources that can help you find ways to create and stick to a budget to avoid financial crisis.

Contrary to popular belief, burying your money in a hole in the ground is one way to make sure that your money is inefficient. Looking for ways to make your money work for you is a good way to make what is called “passive income.” What this means is that while you’re relaxing (or even better, going to class), your hard earned money is hard at work for you earning more money.

Through the use of investment tools such as annuities, mutual funds, penny stocks and even certain retirement accounts, college students can generate additional income and take the lazy money collecting dust in savings accounts and make it active.

A Roth IRA account is an example of an account that students can start contributing to right away. Designed to grow on post-tax income growth, investors can select mutual funds of their liking and contribute a maximum of $5,500 per year to this account without having a tax penalty when withdrawn. In other words, it’s all your money; you don’t have to pay taxes on the money that you put in there, which over time, is huge. Although you don’t see this money until it’s time to retire (or the age of 59 and a half), you have a nice little chunk of change that you can use to live happily ever after.

One of the biggest myths to investing is that you need a ton of money to invest in order to be successful. This is completely false. In fact, many mutual funds and annuities have a minimum required initial contribution of as little as $250. For example, the American Funds mutual fund family contain several funds that are affordable and have a low expense ratio compared to the industry average.

Just last week, I put together a mutual fund portfolio which had an expense ratio of just .72 percent compared to the industry average of about 1.2 percent. An expense ratio is how much of your gain you give up as a fee for fund management. In this example, if you had a fund that gained 10.72 percent, you would net 10 percent after you paid the management fee. Looking for lower cost options will help you keep more of that gain.

According to the New York Times, despite news of economic sluggishness, stocks and mutual funds delivered rapid growth in 2012; the average domestic fund dished out a more than 14 percent return over the period of a year.

Sure, the majority of us college students may not have gobs of money to put into investments, but with a little planning and discipline, even those with income from part-time jobs can easily accumulate enough to start a low cost account.

Here are three benefits of wisely investing your money as a college student (even if it’s $50 a month):

1. Retain the value of your money
One of the basic concepts of business is the Time Value of Money concept. What this states is actually very simple, but it often gets overlooked.

This principle explores the idea that over time, the value of money decreases, which also means that consumer buying power decreases. In other words, a dollar today is worth more than a dollar tomorrow.

Investing your money, however, can help you counter that effect. Many investment tools have generated double digit returns over the last several years and could help you keep pace with inflation so that your money today can still serve you effectively tomorrow.

2. Gives you a good way to pay off debt
Another benefit of putting your money in a growth-based investment tool is that it gives you a generally liquid asset at your disposal while considering how to pay off student loans.

When you need to write that check, are you going to have enough to comfortably fit your student loans in your budget? Investing now can help you accumulate enough money to take a good chunk out of that debt.

3. Prevents your from blowing money
What better way to keep yourself from spending a ton in the ‘Ville or on useless junk you really don’t need than stocking money away in investments (no pun intended)?

Giving yourself an avenue to make your money grow not only helps you accumulate wealth, but it also helps you avoid unnecessary expenditures. If you keep a set amount of money aside each month specifically to invest, that’s less money that you’ll be burning and more that you’ll be putting aside for your own future.

No matter your outlook on the subject of financial security, the worst thing you can do is to stay blissfully ignorant. It’s as simple as getting on your laptop and Googling something like “how to invest as a college student.”

Sooner or later, you will have a job and real assets and will need to understand how to protect and advance your financial security.

So, why not start now?

Andy Rao is a senior in accounting and finance. Please send comments to news@kstatecollegian.com.

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