As a student, financial freedom is not really a topic that will really interest you. However, did you know that thinking of financial freedom earlier in life will help you to enjoy a life of pleasure for a long time?
Students are notoriously known for always being broke. True financial freedom requires more than just practical tips. You need to have a basic understanding of how money works, and what it means to be financially free.
Since financial freedom is everyone’s goal, it’s important to understand what it is.
- What Does Financial Freedom Mean for a Student?
- How can I Attain Financial Freedom as a Student?
- What are the Benefits of Financial Freedom?
- What Habits Should you Cultivate if you Want Financial Freedom?
- How can I Build Wealth as a Student?
- 5 Keys to Success as a College Student Investor
- 5 Ways to Start Investing as a Student With $1,000 or Less
What Does Financial Freedom Mean for a Student?
Financial freedom means not needing to worry about money. Imagine being able to make decisions in your personal and academic life without being held back by money concerns.
Read Also: How to Calculate Your Financial Freedom?
For a student, it could be as simple as having that extra cash to buy some ice cream after you’ve had your lunch at the canteen (Back in college, dessert was a luxury I could not afford on a normal day!). Financial freedom means being able to focus on studying for your exams instead of worrying whether you have paid the tuition. #Goals, amirite?
It is safe to say that financial freedom is empowering. And thinking about money (on a healthy level) does not make you materialistic or selfish. Money will allow you to function so that you can serve others.
How can I Attain Financial Freedom as a Student?
Educate yourself
Financial literacy goes hand in hand with financial freedom. Read books, listen to TED talks, and learn ways to better manage your money.
As a student, you’re at an advantage. You can get a headstart on learning the ropes of adulting such as investment. Mica Tan was only 13 years old when she started trading stocks. Today, at 25 years old, she is the president and chief executive officer of the MFT Group of Companies.
Sure, not everyone will become a CEO. But there’s truth in the saying, “The early bird gets the worm.” Imagine reaching the age of 25, but having more knowledge and experience than most people your age would have.
Look for scholarships
Finding an alternative way to pay for your education can lessen the burden on your parents. Moreover, a scholarship allows you to set aside money for investments and other needs.
Start a business
Being young gives you a unique strength. You know the needs of your generation. And your familiarity with technology gives you a world of opportunities.
With only US$50 (PHP 2.5K), an LA-based Pinay started a successful online shopping business. With her earnings, she was able to buy a brand new BMW Sports Car at the age of 18, a Mercedes Benz SUV at 23, and a house in Los Angeles at 25!
You could even be one of the young trailblazers, in the likes of Project Lily’s Aya Fernandez, who have found a way to earn money while making a positive impact.
Save money in small ways
You don’t have to wait 10 or so years to build your savings, though. The little money you set aside every now and then adds up. “Hanggang saan aabot ang 20 pesos mo?” they say. PHP 20 x 5 school days a week = PHP 100. That’s PHP 400 in a month, we say.
And if you want to go big, you can start investing your money. The younger you act, the greater the returns.
Invest in yourself
Doing well at school may seem irrelevant to your far-off future. But honing your skills, and discovering your interests now will surely benefit your career in the long run. These factors will guide you in making immediate decisions such as choosing the right college course.
The right college course is your doorway to a career that you are good at and passionate about. Passion breeds grit. And grit leads to success.
What are the Benefits of Financial Freedom?
As we have been discussing, making efforts to achieve financial freedom early in life comes with a lot of benefits. We will now look at four of these benefits.
1. More Security / Less Stress
One of the most basic human needs is the feeling of security. It dictates how we act and the decisions we make every day. Without that feeling, we tend to regress into survival mode, leaving no time to accomplish what we truly want.
This, in turn, ramps up the level of stress in our daily lives.
Imagine how it feels to live paycheck to paycheck, in a serious amount of debt, without knowing if continued changes in medicine are going to sabotage your ability to take care of your family.
Now, imagine how it would feel if you knew that whether you went to work or not, your family would be taken care of. Lifting that burden is immensely freeing, and one of the greatest benefits to financial freedom.
2. Control Over Your Time
Financial freedom gives you the choice to work how and when you want. As such, you can decide exactly how to spend your time. Some may want to continue to practice medicine for the love and passion of it. Others would retire immediately and pursue other interests.
Either way, when all of your expenses are covered by other sources of income, that choice is all up to you, not up to the administration. In this regard, financial freedom is very literally freeing your time.
3. Your Actions Can be More Aligned With Your Values
Now that you can choose to work how and when you want to work, you can choose to do things more in line with your values. No longer do you have to practice medicine in a way that has an element of being driven by profits for yourself or for the system you work for.
For some, that might mean taking care of those who most need it but may not be able to afford it. Some might do medical missions. Some might open and start businesses with social missions.
Either way, once money isn’t the main motivating factor and you don’t have to worry whether you will be able to put food on the table for your family, you can start making choices about how you spend your time–with your values at the forefront.
4 Take More Risks
When you have financial freedom, the world is quite literally open to you.
Some decide to get up and move to a different part of the country. Some end up moving abroad. Not being tethered to one location and job allows for you to take risks and adventures in life.
Again, there are some who would never have taken certain actions, like starting businesses or trying new things, had they not found financial freedom. You can live without fear, knowing that you’re financially secure.
What Habits Should you Cultivate if you Want Financial Freedom?
Achieving financial freedom is a goal for many people. It generally means having enough savings, investments, and cash on hand to afford the lifestyle we want for ourselves and our families—and a growing nest egg that will allow us to retire or pursue the career we want without being driven by earning a certain amount each year.
Unfortunately, too many of us fail to achieve it. We are burdened with increasing debt, financial emergencies, profligate spending, and other issues that thwart us from reaching our goals.
And we encounter unexpected events, such as the pandemic, that overturn our plans and reveal holes in the safety nets we tried to weave for ourselves and our families.
Trouble happens to nearly everyone, but these 12 habits can put you on the right path.
1. Set Life Goals
What is financial freedom to you? A general desire for it is too vague a goal, so get specific. Write down how much you should have in your bank account, what the lifestyle entails, and at what age this should be achieved. The more specific your goals, the higher the likelihood of achieving them.
Next, count backward to your current age and establish financial mileposts at regular intervals. Write it all down neatly and put the goal sheet at the very beginning of your financial binder.
2. Make a Budget
Making a monthly household budget—and sticking to it—is the best way to guarantee that all bills are paid and savings are on track. It’s also a regular routine that reinforces your goals and bolsters resolve against the temptation to splurge.
3. Pay Off Credit Cards in Full
Credit cards and similar high-interest consumer loans are toxic to wealth-building. Make it a point to pay off the full balance each month. Student loans, mortgages, and similar loans typically have much lower interest rates; paying them off is not an emergency. Paying on time is and will build a good credit rating.
4. Create Automatic Savings
Pay yourself first. Enroll in your employer’s retirement plan and make full use of any matching contribution benefit. It’s also wise to have an automatic withdrawal for an emergency fund, which can be tapped for unexpected expenses, and an automatic contribution to a brokerage account or something similar.
Ideally, the money should be pulled the same day you receive your paycheck, so it never even touches your hands, avoiding temptation entirely. However, keep in mind that the recommended amount to save is highly debated. In some cases the feasibility of such a fund can be a question.
5. Start Investing Now
Bad stock markets can make people question this, but historically there has been no better way to grow your money than through investing.
The magic of compound interest will help it increase exponentially over time, but you need a lot of time to achieve meaningful growth. Don’t try to be a stock picker or trick yourself into thinking you can be the next Warren Buffett. There can only be one.
Instead, open an online brokerage account that makes it easy for you to learn how to invest, create a manageable portfolio, and make weekly or monthly contributions to it automatically.
6. Watch Your Credit
Your credit score determines what interest rate you are offered when buying a new car or refinancing a home. It also impacts seemingly unrelated things, such as car insurance and life insurance premiums.
The reasoning is that someone with reckless financial habits is also likely to be reckless in other aspects of life, such as driving and drinking. This is why it’s important to get a credit report at regular intervals to make sure that there are no erroneous black marks ruining your good name.
7. Negotiate
Many Americans are hesitant to negotiate for goods and services, worrying that it makes them seem cheap. Overcome this cultural handicap and you could save thousands each year. Small businesses, in particular, tend to be open to negotiation, where buying in bulk or repeat business can open the door to good discounts.
8. Continuous Education
Review all applicable changes in the tax laws each year to ensure that all adjustments and deductions are maximized. Keep up with financial news and developments in the stock market and do not hesitate to adjust your investment portfolio accordingly. Knowledge is also the best defense against those who prey on unsophisticated investors to turn a quick buck.
9. Proper Maintenance
Taking good care of property makes everything from cars and lawnmowers to shoes and clothes last longer. As the cost of maintenance is a fraction of the cost of replacement, it’s an investment not to be missed.
10. Live Below Your Means
Mastering a frugal lifestyle by having a mindset of living life to the fullest with less is not so hard. Indeed, many wealthy individuals developed a habit of living below their means before rising to affluence.
This isn’t a challenge to adopt a minimalist lifestyle or a call to action to head to the dumpster with things you’ve hoarded over the years. Making small adjustments by distinguishing between the things you need and the things you want is a financially helpful habit to put into practice.
11. Get a Financial Advisor
Once you’ve gotten to a point where you’ve amassed a decent amount of wealth—be it liquid investments or tangible assets that aren’t as readily available to convert to cash—get a financial advisor to educate you and help make decisions.
12. Take Care of Your Health
The principle of proper maintenance also applies to the body. Invest in good health with regular visits to doctors and dentists, and follow health advice about any problems you encounter. Many problems can be helped—or even prevented—with lifestyle changes such as more exercise and a healthier diet.
Some companies have limited sick days, making it a notable loss of income once those days are used up. Obesity and ailments make insurance premiums skyrocket, and poor health may force earlier retirement with lower monthly income.
These 12 steps won’t solve all of your money problems, but they will help you develop healthy habits that can get you on the path to financial freedom—whatever that means for you.
How can I Build Wealth as a Student?
Building a killer investment portfolio doesn’t have to be difficult. You really only need 3 investments to be a successful investor while in college. Which 3 investments? Let us find out.
1. Invest in protecting yourself
Many people have a hard time managing money because unexpected expenses are constantly derailing financial plans. You think you’re good, then your transmission goes out. Or your books for the semester cost twice as much as last semester. Or you have a medical emergency that’s gonna cost you.
So before you invest in anything else, invest in protecting yourself against these emergencies.
An emergency fund is financial priority #1. If you have a fully-funded emergency savings account, you’ll be able to cover emergency costs as they come up, without derailing your other investments. Or worse, having to put this emergency expense on a high-interest credit card!
As a general rule, you should have at least enough money in your emergency fund to cover a full month’s worth of expenses (rent, car payment, food, utilities, etc). That way, even if you lose your job, you’ll know you can make ends meet for a full month while you find a new job.
As you get older, you’ll probably want to increase this amount to 3-6 months’ worth of expenses. This is because it takes longer to find a replacement job if you’re higher on the career ladder. But for now, when an entry-level job will suffice, a month should cover you.
So start saving as much as you can each month in a high-yield savings account (you need this cash available at a moment’s notice, so a liquid savings account is the safest place for this money). Once you have enough to cover a month of expenses, you can stop saving to that account and move on to the real investments!
2. Invest in your retirement
You may be wondering why we’re discussing retirement when you haven’t even officially started your career. Fair question!
The secret to investing is giving your investments time to grow. Thanks to compound interest, you don’t just make money on your money; you make money on the money your money is making.
But that takes time. The more time you can give your investment to grow, the higher and faster they’ll end up growing. So if you want to retire rich or retire early, your best bet is to start planning for retirement while you’re still in college.
Employer-sponsored accounts, like the classic 401(k), are often the best option (assuming your employer offers retirement benefits). But they certainly aren’t the only option. If you don’t have access to an employer-sponsored account, consider a Roth IRA.
Once you open your retirement account, you’ll be able to select the investments you’ll keep in that account. My personal fave investment for retirement accounts is index funds (the worst kept secret on Wall Street!). Index funds are low-cost and low-maintenance. They’re also automatically diversified.
A share of an index fund is like a little sampler basket of dozens (or even hundreds!) of different stocks and/or bonds. So instead of putting all your eggs in one basket by choosing stock from a single company, you’re spreading your risk among lots of different companies without doing any extra work.
Now, how much should you invest for retirement?
Well, that largely depends on your unique lifestyle and your personal needs. But generally speaking, Americans aren’t saving nearly enough for retirement. A good rule-of-thumb is to aim for 10-12% of your income.
If that sounds like too much, start smaller. Try 3-5% for now. Then add a percent or 2 each year until you’re saving the 10-12%.
And as a college student, you may not make that much money. Or you need it for other things. That’s totally fine – just try to save a little bit and your future self will thank you.
3. Invest in your dreams
A solid investment portfolio should also include an account (or 2 or 3!) with the sole purpose of making your dreams come true.
Whether you want to start a business, travel the world, buy a home, put your own kids through college, or launch a non-profit organization, you need to include these dreams in your investment plan.
The amount you need to save depends on:
- the total amount you need and
- when you need it.
Here’s a simple formula: Total amount needed / # of pay periods until your target date = the amount you need to save from each paycheck
Now, where to invest that money?
The sooner you need the money, the more liquid the investment type should be because you need immediate access to the money. And the longer you have, the riskier your investments can be because you have time for the market to recover from any dip.
Here’s a general guide to investment types by timeframe:
- Immediate goals (within a year): high-yield savings accounts
- Short-term goals (1-3 years): FDIC-insured money market accounts
- Mid-range goals (3-7 years): CDs
- Long-term goals (over 7 years): index funds
These guidelines allow you to keep your money as safe as possible while still growing as much as possible until you’re ready to turn those investments into your dream reality.
5 Keys to Success as a College Student Investor
Now that you know the simple 3 steps needed to create a killer investment portfolio as a college student, let’s quickly discuss 5 tips to help you make the most of your college-year investments.
1. Start TODAY
The sooner you start investing, the more compound interest you can earn. This is what turns Ellie’s lifetime investment of $12,000 into $141,304!
Even if you can only afford to invest 5% of your current income, do it! You can always increase the percentage later. The important thing is to build the habit and get some money growing in those accounts.
Find a way to invest while you’re young and broke, and you will be handsomely rewarded.
2. Automate for guaranteed success
Willpower is overrated. When constantly choosing between buying something today that will provide instant satisfaction and investing for the long term, it’s tough to make the right choice every time.
If you really want to fool-proof your plan, take that choice out of your hands.
Automated contributions not only prevent you from making short-sighted decisions with your money, but they also protect you against simply forgetting to invest.
Employer-sponsored retirement accounts usually take your retirement account contributions out of your paycheck and send it directly to your retirement account. Perfect!
For other investment accounts, simply set up auto-transfers with your bank. They will automatically move your contributions to your designated accounts every payday so you never even have to think about it!
3. Invest windfalls and raises
To really boost your investment balances, invest windfalls and raises as they come your way. Got a tax refund? Invest it! Did grandma send you birthday money? Invest it!
Got a 3% raise? That money can all go to your investments every month since you’re already used to living without it!
4. Give your investments space
The stock market rises and falls. Watching your investment balance daily and lamenting every little drop is no way to live!
And changing your investments in an effort to minimize losses typically ends up losing money in the long-term because of transaction fees.
To save your money (and your sanity!), skip the daily check-ins. Don’t touch them.
Instead, just review your portfolio periodically throughout the year to make sure you’re happy with the big-picture performance of your investments. Once or twice a year, look to rebalance your portfolio if your allocations start getting out of whack.
The goal is to leave it alone because the money you invest you shouldn’t need for many years. If you mess with it, you’ll let emotion take control and you risk making rash decisions.
5. Keep it simple
There are so many options out there. Don’t be overwhelmed by investment analysis paralysis. Go with something simple – like a three-fund portfolio.
Sure, you may never know the ins-and-outs of every investment type. Who cares?! No one does. Don’t let that prevent you from becoming an investor.
You don’t have to understand the wide world of investments to be a successful investor. Keep it simple with your emergency savings, retirement account, and dream fund, and you’ll come out ahead. The best thing to do for your investments is to save money, early and often.
5 Ways to Start Investing as a Student With $1,000 or Less
As a student, you probably don’t have much money to invest. Don’t sweat it; you don’t need much to get started.
What you do need is dedication to the idea of building wealth. It takes consistency, patience, and faith that even though markets drop periodically, they will rise again with time.
1. Get a Head Start on Your Peers With a High Savings Rate
Most Americans are terrible at saving money. The average American only saves around 3% of their income, according to MarketWatch. Don’t expect to build wealth with a savings rate anywhere near that low.
Instead, start by creating a budget. It doesn’t need to be fancy or complicated; in the beginning, keep it as simple as possible. Map out your monthly expenses and your irregular expenses.
As a student, your income may be irregular as well, with much of your income for the year generated during the summer months. Set aside some of that income for a small emergency fund and split the rest between expenses and investments.
Try these financial tips specifically for students, and at this stage in your life, don’t overcomplicate things. Spend less, save more, and resist the urge to show off to your peers through your car or drink-buying generosity.
2. Automate Your Savings
The truth is that discipline will fail you sooner or later, so you want to rely less on discipline and willpower to do the right thing.
If your income is regular, you can set up automated money transfers to your savings account or brokerage account. Another option is asking your employer to split your direct deposit between your checking and savings account or brokerage account.
But your options don’t end there. There are a growing number of apps that help you save money automatically. For example, Acorns will round up your credit and debit card purchases to the nearest dollar and automatically transfer the difference to your brokerage account.
You can easily create an IRA or Roth IRA through a broker like Ally Invest and set up automatic investments through them. Another option is Chime Bank, an online bank with similar automated savings services.
Regardless of how you do it, look for ways to automate your savings and investments so that building wealth doesn’t require active work from you every month.
3. Start Simple With Stocks
As a young person, stocks are a perfect place for you to start investing. Yes, they come with high volatility, which is one measure of risk. But over time, they offer strong returns, and since you won’t be retiring for many years, you can simply park your money and ride out the occasional stock market correction.
If you’ve never invested in the stock market before, it looks overwhelming from the outside. You hear analysts talking about PE ratios and dividend yields, concepts that may be a bit fuzzy for you.
And there’s always someone pointing to some obscure technical indicator “proving” that the market is about to crash. Forget all that. Instead, follow these tips.
Don’t Try to Beat the Market
The first rule of stock investing for beginners is: Don’t try to pick stocks. Far too many novice investors – and experienced investors, for that matter – try to get clever and pick stocks that will “beat the market.” It’s a recipe for disaster for all but the savviest equity investors.
Instead, invest in an index fund. Index funds mimic different market indices, with no fancy stock picking involved. For example, you can invest in one fund that tracks the S&P 500 for U.S. large-cap stocks and another that tracks the Russell 2000 for U.S. small-cap stocks.
Index funds charge low maintenance fees, which is more important than most new investors realize. And statistically, they almost always outperform actively managed funds.
After reviewing the data, U.S. News & World Report summarized that your odds of picking an actively managed fund that outperforms a passive index fund are roughly 1 in 20.
Practical Steps to Get Started
The first step is creating a brokerage account. You can use Charles Schwab for their ease of use, low commission ($4.95 per trade), and access to commission-free funds. Another highly reputable option is M1 Finance.
In less than five minutes, you can create an account, whether it’s a regular brokerage account or an IRA or Roth IRA. From there, you can transfer money to the account and start picking index funds to buy.
But don’t let analysis paralysis stop you. If you’re feeling overwhelmed, start with a fund that only tracks the S&P 500. Next month, you can find another fund and diversify.
4. House Hack
As a first real estate investment, and a way to live for free, consider house hacking.
The traditional model for house hacking is buying a small multifamily property, moving into one of the units, and renting out the others. Your tenants’ rent covers the mortgage, and you get to live for free while building equity in an investment property.
Housing is the largest expense most of us incur, so if you can live for free, it frees up an enormous portion of your budget to go toward other investments. The trick, of course, is to make sure you actually save and invest that money, rather than spend it.
If you’re wondering how you can afford to buy a property, one option is to have your parents help you. As partners in your first real estate investment, they can co-sign the mortgage to help you qualify. They may also help you with the down payment.
For your part, you should volunteer to manage and maintain the property, from screening tenants and collecting rents to handling repairs.
As a final thought, remember that real estate ownership comes with sporadic but very real costs. Vacancies, repairs, and the occasional eviction will all rear their ugly heads periodically, so be sure to budget money every month for them.
5. Invest in Crowdfunding
If you’re not ready to buy a property for yourself but like the idea of investing in real estate, one option is crowdfunding websites. They provide loans for other real estate investors, and you provide funding for those loans.
Keep in mind that most crowdfunding websites only accept money from accredited investors, who typically must have a net worth of over $1 million or earn $250,000 or more per year. As a student with limited money, you are not one of these.
But there are a handful of real estate crowdfunding websites that are open to everyone. Here are a few options available to you as a student just starting out:
- Fundrise. Since its inception, Fundrise has paid investors returns ranging from 8.7% to 12.4% between their various fund options. Anyone can invest with a minimum of $500 and choose between investments that are more income-oriented or growth-oriented.
- RealtyMogul. With several options for investment funds, RealtyMogul accepts investments starting at $1,000. For example, their MogulREIT 1 fund has returned 8% per year, paid out in monthly distributions, since its inception.
- Groundfloor. Offering a minimum investment of only $10, Groundfloor lets you dip your toe in the waters of crowdfunding with minimal exposure to see how you like it. They boast investment returns ranging from 5% to 25%, depending on the property grade and lock-in length of the investment. Investors get to choose which types of properties they wish to invest into balance risk and return.
6. Invest in Peer-to-Peer Lending
An alternative to real estate crowdfunding websites is peer-to-peer lending websites. The concept is similar, except the loans tend to be unsecured personal loans rather than real estate investment loans. Like Groundfloor above, in many cases, investors can choose the risk level of the loan, with higher returns offered for higher-risk borrowers.
Read Also: Want to Boost Financial Fitness? Start With The Easy or Big Wins
Read about Prosper, which has a minimum investment of $25, and Lending Club, which has a minimum investment of $1,000, for full details on returns, risk, and ease of use.
7. Start a Side Hustle
No one says you have to invest in someone else’s projects. You can also invest in your own. There are dozens of side hustle ideas you could try out; start with these side business ideas for college students.
One advantage of building a side hustle as a student is that it can grow and develop into a full-time business when your student days are behind you.
Conclusion
As a young person, you’re in a particularly strong position to get a head start on wealth building. While your friends are pumping every penny into things like flashy cars and going out every night, you can start creating stealth wealth for yourself.
Take advantage of compounding and time and let them do the heavy lifting for you. To leave you with one final demonstration of its power, consider this example: If you invest $550 per month for the next 10 years at an 8% return, then stopped investing entirely and just let the money grow over the next 30 years, you would end that 40-year span with roughly $1 million.
In other words, it only takes $66,000 of your own cash, invested over 10 years, to reach $1 million; simple compounding does the rest of the work for you if you can let the money sit for the next 30 years. When it comes to compounding, time really is money. So start young, and live long and prosper!
