How and Should I Invest (As a college 18 year old with minimal living expenses)?

Question

I'm currently 18 years old and about to head into college. I have about $1K in savings, and have been told that you should get into investment and saving for retirement early. I make around $200 per week, which about $150 goes into savings. I'm not entirely sure if I even should invest due to my lower financial operations. A lot of the expenses in college are, luckily, going to be paid for. I'm going to school in a large city, so I will not be bringing a car with me, at least for the first year or two.

I've heard that if I start this young, I can create a riskier portfolio, because I have more time for it to recover.

How should I go about starting my investment? Should I look into apps like Acorn or RobinHood, or should I just go for a less risky index fund?

Answer 1

I have about $1K in savings, and have been told that you should get into investment and saving for retirement early. I make around $200 per week, which about $150 goes into savings.

That's $10k per year. The general rule of thumb is that you should have six months income as an emergency fund. So your savings should be around $5k. Build that first.

Some argue that the standard should be six months of living expenses rather than income. Personally, I think that this example is exactly why it is income rather than living expenses. Six months of living expenses in this case would only be $1250, which won't pay for much. And note that living expenses can only be calculated after the fact. If your estimate of $50 a week is overly optimistic, you might not notice for months (until some large living expense pops up).

Another problem with using living expenses as the measure is that if you hold down your living expenses to maximize your savings, this helps both measures. Then you hit your savings target, and your living expenses increase. So you need more savings. By contrast, if your income increases but your living expenses do not, you still need more savings but you can also save more money. Doesn't really change the basic analysis though. Either way you have an emergency savings target that you should hit before starting your retirement savings.

If you save $150 per week, then you should have around $4k in savings at the beginning of next year. That's still low for an emergency fund by the income standard. So you probably shouldn't invest next year. With a living expenses standard, you could have $6250 in savings by April 15th (deadline for an IRA contribution that appears in the previous tax year). That's $5000 more than the $1250 emergency fund, so you could afford an IRA (probably a Roth) that year.

If you save $7500 next year and start with $4k in savings (under the income standard for emergency savings), that would leave you with $11,500. Take $5500 of that and invest in an IRA, probably a Roth. After that, you could make a $100 deposit per week for the next year. Or just wait until the end.

If you invested in an IRA the previous year because you decided use the living expenses standard, you would only have $6500 at the end of the year. If you wait until you have $6750, you could max out your IRA contribution. At that point, your excess income for each year would be larger than the maximum IRA contribution, so you could max it out until your circumstances change.

If you don't actually save $3k this year and $7500 next year, don't sweat it. A college education is enough of an investment at your age. Do that first, then emergency savings, then retirement.

That will flip around once you get a better paying, long term job. Then you should include retirement savings as an expected cost. So you'd pay the minimum required for your education loans and other required living expenses, then dedicate an amount for retirement savings, then build your emergency savings, then pay off your education loans (above the minimum payment). This is where it can pay to use the more aggressive living expenses standard, as that allows you to pay off your education loans faster.

I would invest retirement savings in a nice, diversified index fund (or two since maintaining the correct stock/bond mix of 70%-75% stocks is less risky than investing in just bonds much less just stocks). Investing in individual stocks is something you should do with excess money that you can afford to lose. Secure your retirement first. Then stock investments are gravy if they pan out. If they don't, you're still all right. But if they do, you can make bigger decisions, e.g. buying a house.

Realize that buying individual stocks is about more than just buying an app. You have to both check the fundamentals (which the app can help you do) and find other reasons to buy a stock. If you rely on an app, then you're essentially joining everyone else using that app. You'll make the same profit as everyone else, which won't be much because you all share the profit opportunities with the app's system. If you want to use someone else's system, stick with mutual funds. The app system is actually more dangerous in the long term.

Early in the app's life cycle, its system can produce positive returns because a small number of people are sharing the benefits of that system. As more people adopt it though, the total possible returns stay the same. At some point, users saturate the app. All the possible returns are realized. Then users are competing with each other for returns. The per user returns will shrink as usage grows.

If you have your own system, then you are competing with fewer people for the returns from it. Share the fundamental analysis, but pick your stocks based on other criteria. Fundamental analysis will tell you if a stock is overvalued. The other criteria will tell you which undervalued stock to buy.

Answer 2

You have great intentions, and a great future. As far as investing goes, you're a bit early. Unless your parents or other benefactor is going to pay every dime of your expenses, you'll have costs you need to address. $1000 is the start of a nice emergency fund, but not yet enough to consider investing for the long term. If you continue to work, it's not tough to burn through $200/wk especially when you are in college and have more financial responsibility.

Answer 3

I'd suggest you keep putting money in your savings account and start investing after you land that first big job.

As another answer mentioned, unless you're fortunate enough to have all of your tuition and living expenses paid for, an emergency fund is an invaluable tool for a college student. And the bigger the better.

Your laptop gets stolen or your car's air conditioner (or heater) dies -- both of these things happened to me in college -- and it would have been a much bigger deal for me if I didn't have some money tucked away.

Answer 4

While others have made a good case for how you may want to save and spend I just want to take a moment to comment on Acorn and Robinhood. Having never used either of them, I would stick to the seasoned professionals for my long term investment relationship.

I'm sure they have the right licensing and proper SIPC coverage etc, but I wouldn't, personally, trust my money to an entity that's almost entirely funded by venture capital. I would stick to a company that exists and is profitable on it's own. All of the major brokerage houses (Vanguard, Schwab, ETrade, Scottrade, etc) in the US give account holders access to a list of ETFs and Mutual Funds with zero load on deposits, no or low minimum account balances, no or low investment minimums, and no commissions. With access to these no cost options, I wouldn't waste time with an entity that exists because of it's investor fund raising abilities.

Answer 5

$1K in funds are by default an emergency fund. If absolutely necessary, emergency funds may need to come from debt, a credit capacity. Focus on building credit to leverage lower rates for living expenses eventually needed. Profitable organizations & proprietors, borrow at a lower cost of capital than their return.

Join your local credit union, some provide high interest rates for the for a portion of checking and savings. Some institutions, such as this credit union, have a lower threshold to risk, applicants may be turned down for an account if there is any negative history or a low credit score, a FICO score of 600 or above before applying would be safest.

Setting up a brokerage account with an asset management company with low cost investing, compared with an expense ratio. Depending on your income bracket and tax planning, there are many types of accounts that are designed to encourage saving and lowers your tax burden. If you get a financial advisor, for retirement or any kind of financial assistance, make sure they have fiduciary duties to serve you. There are at least a handful of questions that can be easily found online to ask any advisor before committing to use their services.

Robinhood currently seems to provide the most affordable access to the market. There are a detailed explanations of how Robinhood makes their money on this stack exchange community. The services that power this service such as Plaid, seems promising and underrated. The platform gives access for users the ability to learn how investing works, it seems safest to plan a diversified portfolio utilizing a mix of securities,such as low Beta stocks or "blue chip" companies with clear dividend policies. Another useful feature when investing in equities is the ability to cast votes on decisions in shareholder meetings.

Another popular investment asset class that is less liquid and perhaps something to work toward is real estate. There are many incentives for first time homeowners, saving up for a down payment is the first step or consider adding to your portfolio a Real Estate Investment Trust (REITs) to gain a market position.

If you are interested and plan to focus on equities, consider dropping into your college's Accounting or Finance Capstone courses to learn more about the the details of fundamental and technical analysis of an organization. The complexities of investing involve cyclical risk, macro and micro economic factors, understanding financial statements and their notes, cash flow forecasting - discounting, market timing, and a host of other topics.

The likelihood of beating the market is low however risk is inherit in all things, including sitting on cash that pays the price of inflation. A promising mindset in long term investments are in organizations that focus on conscious long term business practices. Another investment approach is using information available to you given your background then using that in an analysis that may interprets a lower value than the current market rate for a long position, or the opposite for a short. Developing a position that beats the market usually requires independent thinking, constantly becoming familiar with different ideas from professions in a diverse set of backgrounds.

Another tool to help in an analysis is Google finance, or something similar. One of the more useful features is the keep track of “paper” or real trades using a cost basis.