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.
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:
- Vanguard has extremely low fees compared to others, which means more money for you
- Most people are better off NOT picking their own stocks
- 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.
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.
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!