As college students, we’re told to save and spend smart. While these are definitely wise things for students to do during college, money management should also focus on our future. To aim for long-term financial success, students should start investing their money.
The first step in this process is implementing smart saving tactics with any money you currently have.
“Before investing, students should set aside an emergency fund in a bank account or a safe place of about $1,000,” said Terri Holbrook, a senior lecturer in the accounting department at the McCombs School of Business. “That might sound like a lot, but you should have enough money to cover unseen expenses like car repairs, medical emergencies or family emergencies without borrowing money or using a credit card.”
Holbrook said that once you have the appropriate amount of money saved up for a rainy day or emergencies, you can move on to the next step: getting educated about investments.
“Students who haven’t had exposure to finance through family or other activities need to see what the abbreviations and the numbers mean,” said Leticia Acosta, Director of BBA Diversity and Inclusion at the McCombs School of Business. “That way they don’t get intimidated by the novelty of it all.”
Familiarizing yourself with anything takes time. As you learn about managing finances, you should put your money where it matters.
If you have spare cash earned from a part-time job or elsewhere after you create your emergency fund, the best place to put it is a ROTH IRA account. “For those who aren’t familiar with what this is, it is an account that can be opened at a brokerage or a bank that grows (your savings) tax-free and is a long-term investment that you leave until retirement,” said Holbrook.
Using this strategy, you can build savings for the future even in college. The best part is that when you withdraw money from this account when you’re older, it is completely tax-free.
Professor Holbrook’s suggestion is different than a 401K or regular IRA since those accounts are fully taxable income — just like a regular salary. Once this account is established, you can use it to invest strategically.
Matthew Hopp, business honors and finance junior, said, “using a ROTH IRA, you could consider investing in index or sector stocks for things like the S&P 500.” Hopp recommends that these index stocks, which measure a section of the stock market, and sector stocks, which reflect the performance of an industry such as oil, are preferable since you can avoid risks that come from the volatility of single stocks. This avoids putting all your eggs into one basket.
Students who manage their own money should build money for a long-term investment horizon, not to make quick cash.
As the Director of Investment for the University Securities Investment Team, Hopp suggests that first-time investors reduce trading fees as much as possible. “If you minimize your brokerage fees by not trading a lot (day trading) and avoid high-fee funds, these will help you avoid the capital gains that get taxed at higher rates,” said Hopp.
Although you should be conscious about your investments, remember that managing your investments shouldn’t be the only thing you worry about
“Mastering your finances comes by having proper goals,” Acosta said. “Diversify your assets so that you have a balance between savings and investment.”
As you navigate through financial investments for the first time, don’t get scared. It might seem like a lot to learn, but the experience is a good way to grow. After all, we reap what we sow.
Ancheta is a business freshman from Houston.