Many college students dream of becoming multimillionaires who split their time between philanthropic efforts and exotic travel. But the trouble is that we’re not always adept at making or saving money. Few of us will end up as multimillionaires, but learning how to make smart investments will help us live comfortably and provide for our families’ needs. In fact, according to School of Family Life professor Jeff Hill, any student can invest, no matter what how tight a budget he or she keeps.
Investing Tips for Students
Take Advantage of Compound Interest
Professor Hill is an expert on saving and budgeting money. In fact, one of his undergraduate courses — SFL 260, Family Finance — teaches BYU students those important skills, and Dr. Hill even co-authored the textbook that the students use (Fundamentals of Family Finance: Living Joyfully within your Means). In a June 2015 BYU devotional, Dr. Hill told a story about four hypothetical students, who each had $10,000 and who each planned on retiring 50 years down the line.
The first student put his money in a strongbox, meaning he would still have $10,000 in 50 years. The second student put her money in a savings account, where compound interest would double its value every 25 years. She’d have $40,000 at the end of the 50-year period. The third student put his money in a government bond mutual fund, where it would double every 15 years to become almost $100,000 in a 50-year span. The fourth student put her money in a broad diversified stock market fund, where it would double every seven and a half years. In 50 years, the student would have more than $1,000,000.
“That is the miracle of compound interest,” Dr. Hill said. “When you consistently invest like the fourth student, you have the peace of mind that comes from knowing you will be able to retire in the future and that if an emergency happens now, you have a reserve.”
Dr. Hill said that any student can invest, no matter what how tight a budget he or she keeps. Some mutual funds even cater to small investors who can only afford to put a little bit of money into the stock market. “I invite my students, and I invite you, to begin to invest now,” he concluded.
Take a Little Risk, and Diversify
To Dr. Hill’s tips, Economics professor Scott Condie, who has published papers describing the effects of ambiguity aversion (the preference of known risk over unknown risk) on investment. It’s common among many investors, driving them to have less diversified portfolios and to participate in the market less often. “Ambiguity averse investors will almost surely have their wealth converge to zero if there is a rational expected utility maximizing investor in the market,” Dr. Condie wrote. In other words, investors who remain sufficiently ambiguity averse will not survive.
So make sure that you have a diversified portfolio, that you participate actively in the stock market, and that you don’t entirely avoid risk. After all, what’s life without a little risk?
How do you save, budget, and spend your own money?
Take a minute to think about your own finances. If you’ve got any questions about personal finance or investing, let us know in the comments, and we’ll get a research-based response to you!