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Investing

It’s complicated, but if you can, you should do it.

If you are a college student, finances are probably a sensitive topic. Between working part time to pay for college or not having time to earn money due to the all-consuming life of a student, your bank account is probably not exploding with money. As the weight of ever-increasing tuition rates grows heavier, investing is unlikely to be a high priority for a college student. However, it is critical to future financial well-being and is easier than you would think — you just have to make the effort to begin the process. Here’s how to decide if investing is right for you.

When should you start investing?

My sixth-grade social studies teacher closed out the year by proclaiming, “If you remember one thing from this class, invest your money as soon as you can.” As an impressionable tween, I found his promise of becoming a millionaire before the age of 40 extremely appealing. As an adult, the question becomes when exactly is “as soon as you can”?

Mathematically, you should always invest your money earlier rather than later. To simply put, the earlier you start investing, the more time your money has to grow, thereby increasing your investing returns. However, first, your significant debts should be taken care of, especially those that are high-interest; it doesn’t make sense to invest money when the amount you owe is accruing elsewhere. Take care of outstanding student loans before setting your sights on the stock market. Second, establish an emergency fund for those unexpected situations such as a medical operation or transmission failure. Have enough money to be able to pay at least a month’s worth of living expenses. If those two conditions are met, it’s worth your time to start thinking about investing.

What types of investments are there?

Bonds, stocks, mutual funds, individual retirement accounts (IRAs), certificates of deposit (CDs) and money market funds — just a sprinkling of the many terms that come up in a few minutes of conversation or research about investing. A quick run-through of these terms is needed to enter the world of investing.

Borrowers, which may be corporations, municipalities or the government, put up bonds, asking investors to lend them money for a certain amount of time in exchange for the promise of a fixed interest rate. The payout is consistent. However, in most cases, the money cannot be taken out of the bond without incurring a penalty until it has reached maturity.

Stocks are probably the most familiar term of the bunch. Essentially, stockholders own a share of the company and depending on how well or poorly the company does, the value of the shares goes up and down accordingly. Stocks are generally the most volatile investment, but the higher risk means a greater potential to reap big rewards.

A professionally-curated combination of investments is called a mutual fund. Its portfolio may contain stocks, bonds and other securities. The company’s experts manage the holdings in the portfolio for a small fee, but the diversification of investments provides a balance between potentially high-reward investments, and lower-risk but more stable investments.

IRAs are an investment in a retirement plan that has tax benefits. In a traditional IRA, the tax benefits are upfront — any money you put into your IRA is tax-deductible. You don’t have to pay taxes now, but any withdrawals in retirement from the IRA will be taxed. In a Roth IRA, pre-retirement investments are taxed, but withdrawals in retirement are tax-deductible. The difference lies in when the tax benefit is applied.

Offered by banks and credit unions, CDs provide a predictable return over a fixed time interval. During that term, the money in the CD must remain deposited until maturity to avoid penalties.

Money market funds are not to be confused with money market accounts, which are more similar to a savings or checking account than an investment. Money market funds are more like mutual funds, except their diversified investments are focused on short-term instruments.

How do I decide which investments are best for me?

The key differences between the types of investments come down to liquidity, risk and return. With stocks and mutual funds, liquidity is high, but risk and potential returns are high. This means that while you can withdraw your money from those investments right away, there is also a significant chance that it won’t be a similar amount to the original deposit, for better or worse. On the other hand, CDs and bonds give fixed returns, but liquidity is lower as you cannot withdraw your deposit from those investments until they mature, at least without incurring fees. Money market funds trade their low risk and low returns for high liquidity. You can withdraw your money at any time, but the number of times may be limited. Finally, IRAs are not even considered a liquid asset, as the invested money is supposed to stay in the account until retirement. Any early withdrawal will lead to a penalty.

If you need access to your money quickly but want to make more than the interest rates of bank accounts, money market funds are the way to go. However, if you don’t need your money right away but imagine you will need it in a few years, CDs and bonds may be your best option. Stocks and mutual funds are higher risk investments, especially for the short term, but are necessary for significant profit in the long term. So, if you have money that you can put away for decades without needing it, consider stocks and mutual funds. If you have a relatively consistent stream of income and can afford to start putting some of it toward retirement, you might want to begin investing in your IRA annually.

This guide is a step toward starting the investment process, but it shouldn’t be taken as an expert’s opinion. Investing is complicated, but if there is one takeaway, it’s this: Investing is almost always better than doing nothing. If you have the financial ability (no noteworthy debts to pay off and an emergency fund to fall back on), make the effort to consult with an advisor and decide which investment option is the best for you.

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