Between tuition, textbooks, housing, and living expenses, higher education costs can add up fast. Investing is probably the last thing on your mind as a cash-strapped student. But did you know? Starting small and early can pay off in the long run. With proper planning and smart money habits, you can invest successfully in college. Contrary to popular belief, you don't need thousands of dollars to begin investing. Students are growing their money with as little as $5 to start! Educating yourself about investing basics now will build a strong foundation for financial stability after graduation.

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Why Should I Start Investing in College?

You may have heard it's best to wait until after college to even think about investing. After all, how could a broke college student possibly afford to invest? Despite financial constraints, there are compelling reasons why investing early in your school years can pay off. For starters, investing teaches the value of saving money consistently over time to build wealth. Establishing smart saving and investing habits while you're young helps cement positive financial behaviors you can continue throughout your adult life. Investing early also allows more time for compound interest to accumulate. Compound interest causes the money you invest to generate earnings on top of your existing principal investment amount. This will create exponential growth over decades. Starting early means more years for your money to compound.

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What to Do Before Investing

Jumping into investing as a college student without proper planning is risky. Before you put limited funds into investments, take these three essential steps:

1. Make a Budget

First and foremost, you need a solid budget you can stick to. Track where your income comes from:

• Financial aid
• Part-time work
• Family contributions

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Likewise, tally up regular expenses:

• Tuition
• Housing
• Groceries
• Utilities
• Books
• Gas and transportation
• Fees and dues

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With your income and expenses laid out, look for areas where you can cut back discretionary spending:

• Dining out
• Entertainment
• New clothes or gadgets

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Finding ways to spend less and save more will free up extra cash you can direct toward an emergency fund and investments.

‍Pro tip: Helpful budgeting apps like Mint and You Need a Budget (YNAB) can simplify managing your money and identifying savings opportunities. Using an app's customizable categories and reports helps you build smart budgeting habits from the get-go.

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2. Build a Strong Emergency Fund

Having quick access to cash in case of unexpected expenses or income loss should take priority over investing. That's where an emergency fund comes in — your rainy day savings account with at least 3-6 months of living expenses. As a student, an emergency could include:

• Sudden medical bills
• Academic expenses like buying course materials
• A computer crash
• Car repairs

Protect yourself by building emergency savings you can withdraw in an instant if one of these financial surprises happens.Set aside a little bit of money regularly from gifts, work income, or other sources until you have enough emergency cash reserves.

‍Pro tip: Keep your emergency fund in an easily accessible high-yield savings account or short-term certificate of deposit (CD). High-yield savings accounts from online banks offer interest rates up to 20 times higher than traditional savings accounts. Short-term 3 to 6-month CDs also provide higher yields while keeping your money accessible. You want the money to remain liquid and available when you need it.

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3. Have a Healthy General Savings

Emergency savings provide your basic safety net. But you also need general savings to cover anticipated expenses and financial goals. Look at your average monthly costs for essentials like:

• Housing
• Transportation
• Food
• Utilities

Multiply your monthly spending by 3-6 months to find your general savings goal number. Building general savings takes discipline. But it's necessary to ensure you have enough funds to cover bills, rent, or tuition when expected. It also gives you the flexibility to handle minor unexpected costs without needing to tap into emergency savings.

‍Pro tip: Set up automatic transfers from each paycheck or financial aid disbursement to go straight into savings. Online banks like Ally offer high-yield savings accounts specifically for building short-term savings.

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Investment Options for Students

Once you have a handle on budgeting, emergency savings, and general savings, you can begin investing extra money with proper risk management.The following options are ideal starters:

Stocks

Stocks represent owning a fractional share of a publicly traded company. When you buy a stock, you invest in that company's future success.In the short term, stock prices fluctuate daily based on market sentiment. But long-term, a stock's price reflects the company's financial growth. If the company expands profits, the stock value typically rises with it. Individual stocks can see huge growth over decades. But prices can be volatile short term, with massive fluctuations. High-flying stocks may drop 50% some years before continuing to outperform long-term. Others may surge 50% or more annually in hot markets.Have a lower risk tolerance? ETFs may be a better choice for you, which we'll explore next.

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Exchange-Traded Funds (ETFs)

Exchange-traded funds (ETFs) contain bundles of assets like stocks or bonds in one fund. A single ETF may hold dozens or hundreds of stocks.ETFs often focus on stocks in specific sectors like technology, dividends, or industries like finance. Specialized ETFs may give you higher returns. Many ETFs track major market indexes like the S&P 500, which covers 500 of the largest US companies. Since ETFs own multiple assets, you get built-in diversification by investing in one. This lowers risk and volatility versus individual stocks. While stocks offer higher growth potential, ETFs give you downside protection. For college students, ETFs offer an affordable, diversified way to gain exposure to sectors and asset classes. Leading broad market ETFs like VTI and VOO make smart foundational investments.

Mutual Funds

Mutual funds pool money from many investors into a portfolio of stocks and bonds that a professional manager chooses for you. The pooled money means lower investment minimums — often between $500 and $5,000. Look for no-load funds without commission fees. Vanguard, Fidelity, and Charles Schwab offer reputable funds.

Robo-Advisors

Robo-advisor platforms use algorithms to automatically invest and manage portfolios tailored to your financial goals and risk tolerance. Simply set up your account. Then, the robo-advisor handles portfolio construction and optimization. This option is ideal for beginners wanting a more hands-off approach. Top choices include Wealthfront and SoFi.

RELATED >> What Is Diversification?

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5 Steps to Start Investing While in School

Once you understand basic investing concepts and options, it's time to put your money to work. Follow these steps to begin investing while in school:

1. Open an Investment Account

Choose a low-fee brokerage account to open.Top picks for beginners include:

• Fidelity
• Vanguard
• Charles Schwab
• Apps like Robinhood

You can open an account easily online in minutes by visiting the brokerage's website.

2. Fund Your Account

Link your bank account to transfer money into your investment account. Even small amounts like $5 to $20 monthly will add up. Contribute spare cash gifts, work income, or student loan refunds to invest.

3. Select Your Investments

Build a diversified portfolio starting with broad stock index funds and ETFs like VTI or VOO. Add some individual stocks if desired. Keep contributing to these over time.

4. Automate and Reinvest

Set up automatic transfers from your bank to the investment account on an ongoing basis. Automating makes investing effortless. Reinvest any dividends earned to compound returns.

5. Hold Long-Term

Avoid panic selling when markets dip. If you've done your research and know the investment has good fundamentals, you shouldn't have to worry. Invest for long-term growth over the years — not short-term speculation. With the right account, consistent funding, smart investments, and a calm buy-and-hold mindset, your money can grow exponentially while you focus on your studies.

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Start Investing Early and Think Long-Term

College is an optimal time to adopt smart money management habits that set you up for long-term success. This includes investing! By starting small, sticking to a reasonable budget, and investing extra savings wisely, you can make your money work harder from the beginning. While investing comes with inherent risks, proper education and planning help minimize pitfalls for beginners. Establish an investing routine now that you can continue building on for years to come. Your future self will thank you!

‍Disclaimer: This article is for informative purposes only, and shouldn't substitute seeking professional financial advice. Consult with a licensed financial professional before making any major decisions or implementing any strategies. We are not endorsing any companies, stocks, or financial products referenced in this article. All investments come with risk and the reader assumes all responsibility for their own investment research, decisions, and outcomes.