Learning to save and invest as a college student is an excellent way to build financial literacy skills! Savings can be used for fun things like going on a vacation, upgrading technology, purchasing a home or car, or furthering your education. Investing on the other hand, is useful when planning for retirement, becoming an entrepeneur, or long term financial success.
Below we take a deep dive into the three categories of savings: emergency savings, short-term savings, and long-term savings.
Financial experts recommend that you save 10-20% of your net income as part of your financial plan. Having a financial plan that includes saving can relieve financial stress and provide peace of mind. According to a Federal Reserve study, 40% of Americans cannot cover a $400 emergency and 60% of Americans indicated that finances are the leading cause of stress.
Financial institutions will pay you money called interest for keeping your money at their institution. Compound interest is the money you earn on your account balance, plus the interest that money earns. Compound interest is what allows your savings to grow exponentially. Each institution will determine the interest rate and how often the interest is compounded. Your account balance, interest rate, and rate at which the interest is compounded will all factor into how much money you will earn.
An emergency fund is your very first step to saving and investing. Financial experts recommend you have at least $1,000 in an emergency account since many emergencies fall under $1,000, with a goal of saving three to six months of living expenses for more costly emergencies, such as a job loss.
A basic savings account at a financial institution will allow you to save money and earn interest on your emergency fund. A basic savings account won’t yield a high interest rate, but allows you to access the money easily with no penalty. Many basic savings accounts require a small minimum account balance and limit the number of withdrawals without a penalty.
Short term saving is good for smaller purchases, social outings (i.e. concerts), or vacation. Long term saving is good for major purchases like buying a house, car, or saving for retirement. Below are a few accounts you might consider.
Money Market Accounts generally pay a higher interest rate, require a minimum balance, and include limited features of a checking account. You can access the account in person, with an ATM card, and write a limited number of checks. Financial institutions are required to limit withdrawals on money market accounts to six per month. A fee may be charged if your account falls below the minimum required balance or if you exceed the limited number of monthly withdrawals.
Certificates of Deposit (CDs) are ideal for long-term savings goals, such as a down payment on a home or a college education. Depositing money in a CD is a commitment to leave your money in the account for a specific period, such as six months, one year, or five years. This period is called the "term" of the CD. The date on which the stated term ends is called the "maturity date." Typically, the longer the term selected, the higher the interest rate.
It's important to leave your money in the CD until the maturity date, because early withdrawals may be subject to an "early withdrawal penalty," including loss of some or all interest. Many CDs automatically renew, so when your CD reaches the maturity date, you have a short time (typically 10-15 days) to withdraw your money or allow it to roll into a new term.
An individual retirement account is one of the best ways to invest your money. Other common investing options can be linked to your retirement account. Even if you're wanting to become a business entrepeneur who buys stock or real estate, retirement is still a good place to start. You likely won't have much money to invest in real estate until after you graduate college. Buying stock is very volatile and is not a surefire way to "get rich quick".
If your employer offers benefits, your employer retirement account can be used for investing purposes. For-profit companies offer 401k accounts and nonprofit companies offer 403b accounts. Employee sponsored retirement accounts are desirable because many employers contribute to the employee's retirement account. If your employer doesn’t have this option, or you are self-employed, you can obtain an individual retirement account, also known as an IRA, from a financial institution. There are two types of IRA accounts: Traditional IRA and Roth IRA. Both offer tax benefits to the employee as they save for retirement.
Various Types of Investment
