Investment Options for College Students Revealed

Question: I’m currently in college and I am looking to get started investing. What are the best investment options for me?

For first time investors, especially those still in college, investing can be a daunting challenge. Given the number of investment options, it is no wonder many people don’t begin investing at a younger age.

In this post you will learn about what the investment options that are available to you. These options are broken down into different categories which will depend on how long you plan on keeping that money invested.

What is your time frame?

What investments you choose to go with will depend largely in part on how long you plan on keeping that money invested. In other words, how long do you think you will go without having to touch your savings?

There are several investment options available for those who don’t plan on needing money for a long time and for those who will need money in less than a year and everyone in between.

Different time frames

The first thing that you want to do is understand the four basic time frames for investing. By understanding your time frame you will be able to make the most educated decision as to where to put your money.

Very Short Term – If you think you will need to use your savings within the next year, you will have a very short term time horizon. This would be you if you think that you will have to use your savings to cover expenses at some point within the next 12 months.

Short Term – If you think you will be able to put you money away for over a year, but might need access to it within the next three years, you would have a short term time horizon.

You would have a short term time horizon if your future is uncertain, and you do not know what will happen in the next few years.

I imagine most college students would fit under this category. Uncertainty in the job market and your living situation make it better for you to have money quickly accessible, given the unpredictability of your situation.

Intermediate – If you think you can put away money for the next three to six years, you would fit best under this time frame.

A person in an intermediate time frame would be one who would likely need money in a few years to purchase a home, pay for a wedding, or some other large expense, which would require a significant amount of cash.

Long term – If you are able to put away money for ten years or more, you will take a long term approach to your investment decisions.

This would be you if you are comfortable not touching your money for at least ten years. If you can get comfortable with not having access to your cash for that long, this approach is best for your.

What time horizon are you?

Now that you have learn of the different time horizons, which one best suits you? Keep in mind you don’t have to be ONLY short term or ONLY long term.

You have flexibility in what you choose with your decision. This exercise is just to help you understand what investments you should be making based on your situation.

Here is what I want you to do: Figure out how much savings your have (or you plan on having) and then determine what percentage you plan on putting away for a certain time horizon.

For example, if I had $40,000 put away, I would put away 15% for very short term, 20% for short term, 25% for intermediate term, and 35% for the long term.

Don’t take too long to do this, but just jot down some numbers to get an idea, and then continue reading below.

Investments to make based of your time horizon

So you now have an idea of what your investment time horizon is. Simple enough, right? Now let’s get to the meat of the subject: what you should invest your money in.

Very short term investments

If you have a very short time horizon, you are best keeping your money in a checking account, high yield savings account, and money market account.

Checking Account

Now, a checking account is not really an investment option and I know you already have one open. The only reason I put this here was because you do need some money on hand so you can cover typical monthly expenses, along with any unexpected repairs and other expenses that could pop up.

Other than that, checking accounts don’t yield any money. They are more like a storage space for you cash that you have immediate access to. Now on to the actual investments…

High Yield Savings Account

Opening a high yield savings account is a useful option for the very short term and short term investor. High yield savings accounts have a return of about 0.75% to 0.95%, depending on where you open your account.

You generally will not get that high of a yield if you go to your local or big branch bank. The best savings accounts are usually found online and will require a little research, but are well worth the time and effort.

Money Market Account

Money market accounts are similar to a savings account in terms of returns. They net an average of 0.75% to 1.00% a year, depending on where you go.

Money market accounts and savings accounts are very similar in nature. You really should not spend too much time deciding between the two. Just pick the one you think is best and go with it. Close your eyes and pick one. It doesn’t really matter. What matters is getting started today.

Short term investments

You already know of two short term investments, high yield savings accounts and money market accounts. In addition to those two, another short term investment option is a Certificate of Deposit.

Certificates of Deposit (CDs)

Certificate of Deposits are investments in which you place you money for a set period of time, and do not touch that money until the term is up.

As a result, you get a slightly better return on your investments. Keep in mind, the terms of a CD can vary from a few months up to a few years.

Returns for a one year CD will be about 1% whereas your return for a two year CD will be around 1.10% to 1.40% per year. Basically, the longer the term of your CD, the higher your rate of return.

CDs are not quite as attractive as savings accounts or money market accounts because the money is locked in for a set period of time. While you do get slightly better returns, you will generally not have access to that cash until your CD is fully matured.

One note about short term investments

With many short term investments, you will get higher returns for the more money that you invest. Banks do this to encourage you to give them more money, and the reward you with a higher yield on your investment.

Also, there are a number of extremely useful resources on the web to help you find different savings accounts, money market accounts, and CDs, along with the rate of return on those investments as well as any fees you have to pay to own them.

Long term investments

For now I will skip intermediate term investments and will get back to them shortly. The reason for this is because intermediate investments are simply a mixture of long term and short term investments.

What types of investments for the long term?

The two investments you would want to make for a long term time horizon are in stocks and bonds. The reason for this is because stocks and bonds will yield much more over a longer period of time than other investments.

In addition, stocks and bonds are more volatile in the short term, so their value could drastically go up or down in any given day. They are not good short term investments for this very reason.

Stock and Bond Funds

The two types of long term investments that would be best for any beginner are the Vanguard Total Stock Market ETF (VTI) and Vanguard Total Bond Market ETF (BND).

It is recommended that you have 50% of your balance in stocks and 50% of your balance in bonds to help hedge your risk.

The reason you should invest in these two ETF’s are numerous:

  1. Vanguard has extremely low fees compared to others, which means more money for you
  2. Most people are better off NOT picking their own stocks
  3. You get good coverage of the total market, and thus diversify your portfolio by investing in these two.

Another Option for long term investors

Another investment option for long term investors is a Target Retirement Account. These investments are good because they require no management on your part.

You would want to invest in a Target Retirement Account if you plan on keeping your money invested for a very long time (retirement basically), because your portfolio will change over time.

Intermediate investments

Finally, we are on to intermediate investments. With intermediate investments, you basically want to balance short term investments with long term investments.

Remember the exercise that you completed above? You figured out what percentage of cash you would need in the short term, intermediate term, and long term. This is pretty much how you will want to balance your investments.

You will spread your investments across your savings account, money market account, CDs, stocks, and bonds.

Now I could write an entire article on how you would want to do this, but the take home message is this: you should always spread your investments among different time horizons, depending on your own situation.

Conclusion

Above I have presented investment options for college students. I believe that they best way to understand your options is first by understanding how long you plan on investing your money.

From there, you will have various options to choose from. Don’t complicate things, just GET STARTED. Thinking too much will lead to analysis paralysis.

Take some time to carefully consider your options, then act immediately. RIGHT NOW!

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I made 59% on one stock in nine months, here’s what I learned

Yesterday when I was checking my stocks, I was pleasantly surprised when I saw one of my stocks was up nearly 20% for the day. Not only that, but the stock had climbed nearly 60% since I initially bought it in September of 2013.

The stock that I’m referring to is Williams Company (WMB). When I bought the stock on September 5, 2013 I paid $35.10 for 15 shares. Yesterday (June 18, 2014) I had sold the 15 shares at $55.90 per share. This resulted in a 59.3% return on this stock in only nine months!

Lesson learned

Why did I buy WMB in the first place?

When I bought the stock in the first place, I was looking for a high dividend paying stock. When I found WMB it was paying out dividends around 4.5%.

In addition, the stock seemed to be trading at a low price at the time. It seemed like a no brainer to buy this stock. My thinking was flawed, which I will get to in a minute. Regardless, I bought 15 shares at $35.10 and watched the stocks grow over the coming months.

Why did I sell WMB yesterday?

I sold WMB for a number of reasons, the most important being to lock in my gains.

I made over $310 or about 59% on my investment, and I didn’t want to lose out on locking in that money for good.

Currently, WMB seems to be overvalued. The stock has a PE ratio around 96, which is ridiculously high when compared to similar companies in its industry. Now seemed to be a good time to get rid of a stock which will probably drop off in a matter of time.

The flaw in my thinking

When I bought WMB I was under the impression that I was getting the stock at a reasonable price. The stock was trading close to its 52 week low. Truth is, the stock wasn’t really that cheap when looking at its PE ratio.

While the PE ratio was on par with other companies in WMB’s industry, that was not really a sign that it was a stock to buy. I didn’t do much research before jumping into this stock. Honestly, I got lucky that it shot up the way it did.

I held on and reaped the benefits and got out on my own terms

I had actually though about selling WMB on multiple occasions. The reason I held on was because the stock’s value was continually increasing.

I realized that I needed to sell the moment the stock jumped 20% in one day and I made over 50% in less than a year. Sure, the stock could keep going up but I don’t want to take that risk.

Take home message

When it comes to investing you need to recognize when you are lucky and when you were actually skilled. Too many people think they have the secret formula to making money in the stock market.

At the end of the day it’s safe to say that I got lucky with this stock. I invested on a flawed premised and I am grateful that I made the money that I did, but I don’t feel like it was because of some skillful move.

 

First Time Investor: What do I do?

I was recently talking to a family friend about his finances. He seemed very interested in getting started in investing money. Keep in mind, the family friend is turning 30 this year built up an emergency fund and is now looking to invest $3,500.

On top of that, the family friend does not know anything about investing. Now, I could have gone on and told him about IRA’s, 401(k)’s, and individual brokerage accounts, but I knew two things would happen:

  1. He would get bored with what I was saying and just want me to tell him what to do
  2. I would overwhelm him and he probably would put investing on the backburner for a while until he was able to “figure it out.”

Getting Started

So, what I told him was that it was very simple to sign up. All he had to have was a computer, over $3,000 in his bank account, and his estimated retirement age. With all of this available, he would be well on his way to building his retirement account.

The very first thing I suggested to him was to sign up for an account at Vanguard. He didn’t ask why, but if he did I would have told him this: Vanguard charges the lowest fees of any other mutual fund provider. Lower fees means more money in your pocket when you retire.

So, he signed up for an account at Vanguard. The next thing I had him do was sign up for a Roth IRA account. You can read more about why you should always choose a Roth IRA here.

Account ready and Roth IRA set up, he deposited his $3,500 into his Vanguard account. Then he asked me “What should I invest my money in?” Once again, I could have gone on a tangent about exchange traded funds vs. mutual funds and asset allocation, but I skipped the lecture.

I asked him, “When do you plan on retiring?”

He responded, “I don’t know, maybe around 60 I guess?”

“Okay, that’s all I needed” I told him.

I showed him Vanguards mutual funds, filtered “Asset Class” for “Balanced”, selected “Target Retirement 2045” and we were done. He has just made his first investment into a wide variety of stocks and bonds which automatically balances over time based on his risk profile, without him ever having to lift a finger.

Do you want to get started?

If you are a newbie just getting started with investing, picking a “Target Retirement” dated mutual fund is the simplest way to get started.

All you have to do is figure out your target retirement date, subtract your current age, and add that to 2014 and you will know exactly which fund to invest your money in.

If you are 24 years old and plan on retiring at 65, your Target Retirement date would be 2055. Viola! You are done.

Now that you know what to do, here is why you are doing it

Target Retirement date mutual funds are attractive for a number of reasons:

1. They automatically balance your portfolio for you.

You already know that you don’t want to put all of your eggs in one basket. By investing in a Target Retirement date account, you are investing in a wide variety of stocks and bonds, and effectively spreading your dollar out everywhere. This limits your risk of loss because of diversification.

2. As you get older, your investments become less risky

When you get closer to retirement, the last thing you want to worry about it giant fluctuations in the stock market destroying your investments. Target Date mutual funds become less risky as you move closer to your retirement date, making it less likely that you lose money. As a result, you will have a more stable, predictable income stream in retirement.

3. They are extremely simple to set up and manage

With Target Retirement mutual funds, you literally do not have to do anything at all except put money into the account. Every month you invest your savings into these accounts, and everything else is all taken care of. This is ideal for those who don’t know much about investments and do not care to learn about investments, but still want to retire comfortable.

That’s it!

There you have it. You just set up a retirement account that will do all of the hard work of investing for you. All you have to do is sit back and wait to reap the benefits.

SEP IRA Rules and Contributions: What you need to know

What is a SEP IRA?

A SEP IRA is short for a Simplified Employee Pension Individual Retirement Account. It is basically an IRA account which employers have the ability to contribute to. Employers benefit from having an SEP IRA because it is easier to set up than a 401(k) and also costs less to administer.

Who is eligible?

All employees are eligible are long as the meet these three requirements:

  1. At least 21 years old
  2. They have worked for the employer at least three of the past five years
  3. They have received compensation of $500 or more for the tax year

As a result, any employee who meets these three requirements must participate in an SEP, even if they are only part-time, seasonal, were laid off, fired, etc., during the year.

Why would you want to choose a SEP IRA?

SEP IRAs are must easier to set up than a 401(k). It is basically the same as setting up a regular old investment account. Start up and maintenance costs are also very low when compared to 401(k) plans. Contributions are discretionary, so the employer can decide if they want to contribute to the retirement plan that year. SEP contributions and Traditional IRA contributions are completely separate. That means the employer and employee can contribute to the same IRA account, and the limits applied to the two accounts do not affect one another. A SEP is a very attractive option to a small business owner that wants to provide a retirement account to employees at a low cost.

What are the contribution limits to a SEP IRA?

Employers are allowed to contribute the lesser of 25% of an employee’s compensation for the year or up to $52,000 for the 2014 taxable year. The limit that employers can contribute for themselves is a little more complicated, but it is basically 18.6% of net profit.

What other rules are applicable to a SEP IRA?

The employer must provide the same amount to every employee. For example, if the owner contributes 10% to Sally’s retirement account, they must contribute 10% to every single eligible employee’s retirement account. The last day you can make contributions to a SEP is either April 15th or the extension due date. A SEP IRA is very similar to a Traditional IRA in that:

  1. You can begin to make withdrawals at 59 ½ years old
  2. You must take required minimum distributions at 70 ½ years old.
  3. Funds are invested in the same way as a traditional IRA

Final Word

SEP IRAs are great options for small business owners who are looking to create an employer contributed retirement account for either themselves or their employees.

My crazy financial goal

“I want to be a millionaire in ten years.” That is my goal for myself that I set last October, and I plan on sticking with it. If everything all goes according to plan, I will be a millionaire by the time I am 33 years old.

The reason I chose the goal of being a millionaire in ten years was I had just finished reading Think and Grow Rich by Napoleon Hill. Napoleon Hill illustrated many examples of people who set specific, definitive goals. He said that it is not enough to just wish to be rich. That is not a real goal because you have no way to truly measure it. Goals that can be measure in time and value are much more motivating because you have a very specific point to work towards.

If I don’t become a millionaire in ten years, I will have failed my goal. If I just said that I wanted to be rich in ten years, there is no way for me to know if I failed or succeeded. I suppose I could poll a bunch of strangers and ask them if I am rich, but that would just be silly.

Another point on why you want you want goals to be specific is because you will be much better off in the long run shooting for something and failing than you are by just having a vague goal. By striving for a singular point, you are more likely to push yourself to achieve such goals.

“Shoot for the moon. Even if you miss, you’ll land among stars.” – Les Brown

So that’s it. I want to be a millionaire in ten years. I don’t know how exactly I will accomplish this goal or what the journey will entail, but I do know one thing: I will learn as much as I can through the entire process. I will work hard to provide great value to people. I will do what it takes to become a success.