How should I invest my money as a student?

If you’re one of the lucky few students with money to spare, investing it now can be one of the best decisions you make for your long-term financial health. 

When you’re young, time is on your side. If you invest $1,000 at age 18 with an annual return of 6%, you’ll have $15,466 at age 65. That’s over $5,000 more than if you make the same investment at age 25.

If you’re 21 right now and plan on spending about $30,000 per year in retirement, you only need to get to $133,000 invested by 65 to have $700,000 by the time you retire, assuming a 7% annual return over time. 

But what should you invest your money in as a student? Where’s the best place to start?

The best investment: paying off debt

Sorry to burst your bubble, but if you have any debt at all, paying it off is probably the best investment you can make. No, it’s not as exciting as picking the right stock and watching your money grow. But it’s how you’re going to build the most wealth over the long run.

Here’s why: the interest you pay on most debt is far greater than the amount you could make by investing your money. The expense of interest is the opportunity cost – or hidden expense – of investing. 

Imagine you have $1,000 to invest and $1,000 in credit card debt with a 19.99% interest rate. If you found an investment with a spectacular 10% annual return and put your entire $1,000 into it, you would earn $100. Not bad!

Meanwhile, you would spend an average of $28 per month paying the minimum balance on your credit card, more than $15 of which would go to interest. At the end of the year, you will have paid $185 in interest on your credit card to earn $100 from an investment. After a year, you’ll have lost $85.

Had you used your first $1,000 to pay off the credit card, you would pay no interest and you could have invested the money you put toward your minimum payment to earn an extra $19. For the liberal arts majors in the room, that adds up to a total opportunity cost of $204 to earn $100 – a loss of $104.

Debt-free investing: all about risk

When you’re debt-free and investing to make money, rather than save it, your decisions will come down to your tolerance for risk.

Usually, the riskier an investment is, the higher the potential reward. A lottery ticket can pay 50-million-to-one, with a 100% chance you’ll lose your entire investment. The best 1-year GIC in Canada will pay a modest return of 1.55% per year, with an almost 0% chance you’ll lose any money at all.

Here are some ways you might want to invest your money as a student, depending on how much risk you want to take on:

• The riskiest investments can also be the ones that are the most fun. You can invest in valuables (covering the gamut from precious metals to beanie babies), cryptocurrency, penny stocks, derivatives (like futures and options), or your friend’s fashion line. 
• The next step down the risk ladder includes more traditional investments like individual stocks actively managed speculative funds. People make and lose fortunes every day trying to bet on the right stocks – some with luck comparable to trying to bet on the right horse.
• A more balanced risk profile usually comes through diversification. Mutual funds and low-cost exchange traded funds (ETFs) cover broad areas of the market, betting that gains and losses in individual investments will average out to steady growth. These investments can range quite broadly in terms of risk, with some striving for growth and others aiming for stability.

The lowest-risk investments are also the most boring. This category includes guaranteed investment certificates (GICs), high-interest savings accounts, government and corporate bonds and savings bonds. These low-risk investments all pay modest returns and are almost guaranteed to make money (with GICs, it’s even in the name).

The smartest investors usually pick a well-diversified mix of investments that will grow steadily over time.

Just tell me which stocks to pick

If you’re looking for advice on picking individual stocks, I recommend an episode of the Freakonomics podcast titled The Stupidest Thing You Can Do With Your Money which demonstrates how success in picking stocks essentially comes down to luck. What the research suggests you should do instead is invest in entire markets – a strategy that consistently outperforms all but the very luckiest stock-pickers.

To do this, your best place to start is with a robo-advisor. These online platforms help you invest your money in exchange traded funds, or ETFs, that passively invest in entire markets, and keep your portfolio balanced automatically based on your risk tolerance. If you’re interested in getting started with a small amount of money, Wealthsimple is one of the best robo-advisors in Canada with no minimum investment.

READ: Wealthsimple vs. Questrade

If you still insist on picking individual stocks, online tools like Questrade and Scotia iTrade allow you to start a portfolio online and start trading. You can also use Wealthsimple Trade to trade ETFs and some stocks commission-free. When choosing which companies to invest in, consider who you like to do business with. Which companies show up the most on your credit card statement? Which products do your friends constantly talk about? Chances are the companies you use the most are the ones you’ll feel best about investing in.

When making these types of investments, use a tax-free savings account (TFSA) to avoid income tax on your earnings and only use a registered retirement savings plan (RRSP) if you’re 100% sure you want to keep your money invested until retirement, as early RRSP withdrawals can disrupt your ability to save for retirement later on in life.

Invest in yourself

As corny as it sounds, when you’re going to school you’re investing in yourself. The money and effort you put in will come back to you as earning potential later in your career. If you have the opportunity to invest in an experience that will help you learn and grow as a person, that might be the best investment of all.

The bottom line

Investing as a student can be a great way to set yourself up for financial success later in life. Make your education your first investment, followed closely by paying off debt. If there’s money leftover, consider using a robo-advisor to create a well-balanced portfolio that matches your risk profile, and don’t forget to take advantage of your TFSA so that your investments can grow tax-free.

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• How to start investing for beginners
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• How to invest in stocks