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| Academic Performance | Financial Survival | Social Life | Nutrition and Health | |||
By
UniversityAdvice.com Staff,
May 2006
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A limited budget is almost a defining criteria of student life. However, by investing a little during your years as a student, you may not only make a little more later on, but also acquire the money-managing skills necessary to invest the larger sums of money resulting from a university education. Moreover, you may make enough via your smarts (something University is supposed to be helping you acquire) to be able to afford a few more luxuries during your time as a student. Read on for more information on how you can learn some of the basics of financial investing… **Disclaimer: Past performance reported in this article should not be interpreted as guaranteeing future performance. This advice is given in the hopes that it helps guarantee a prosperous financial future, but as with all things in life, we suggest that you get a second opinion - perhaps from a professional financial advisor - before any investments ** Stocks, mutual
funds, bonds, GICs, NASDAQ, TSX, bulls, bears and the list goes on. With
a technical jargon that is seemingly unparalleled by any other discipline,
it is no wonder many students feel intimidated by the world of investing.
This combined with the ubiquitous lack of cash whilst a student, the virtual
absence of personal finance education in high schools and the reluctance
of many parents to discuss financial planning with their children at the
dinner table leads most students to avoid investing. In this article,
we attempt to shed a little light on the world of financial investing
so that you can use your time as a student to set up a little nest egg
while also learning the fiduciary skills you'll need later in life when
the cash is rolling in. Motivation "Why should I invest?" Many people believe that financial investing is not worth the time it takes to learn the process, select appropriate investments and periodically monitor their portfolios. They believe that the benefits of good investing will be negligible or that they could come out ahead spending that time working longer hours at their day jobs. What these people have failed to understand is the power of long-term capital appreciation - a snowball effect wherein the cash you have invested grows faster and faster the longer you're invested. From January 1926 to December 2004, the S&P 500 index (an index that tracks the performance of the stocks of five hundred of the largest American corporations) had an annual return of 10.46% (see Standard & Poor's site). We will discuss the details of indices such as this one, and of "stocks", later. The important point to understand here is that, on average, if you invested your money in the stock market, you would have gained 10.46% a year such that $10 000 invested today would be worth $11 046 one year from now. Although this may not be very impressive, it is astonishing to consider what would happen if that same ten grand was allowed to grow at 10.46% over an even longer period of time. By a miraculous process known as compounded interest - whereby you make interest on the interest you made in past years - this paltry sum would, for instance, grow to $1 446 278 in only fifty years! A sum of $50 000 invested over that same time period would grow to over seven million dollars ($7 231 392 to be precise). Yes, you could become a millionaire simply by putting aside that money you made working your summer job the last two summers and waiting fifty years, when you will be ready to retire.
Of course, fifty years may seem like a long time. After all, that is long enough to raise a family twice and perhaps fight a couple of world wars while you are at it. Keep in mind, however, that investing is mostly a passive activity. Once you have selected a good mix of investments, you will simply kick back, relax, watch your investments grow and perhaps contribute to your portfolio from time to time. In the meantime, you can continue living life to its fullest, safe in the knowledge that your money is silently working hard for you. And with a little time, patience, and determination, it may in fact work hard enough so that you don't need to work at all. (If that's not a student's dream come finals, I don't know what is! UA.com editor). It is also important to illustrate just how critical it is to get started with investing as early as possible in life. Let's say that you are currently sixteen years old and wish to retire in fifty years from now at the age of sixty-six. If you were to invest ten grand right now, and obtained an average return of 10.46%, you would have $1 446 278 in your bank account come retirement, as we discussed previously. If, however, you waited until you were twenty to invest that ten grand, your sum would grow to only $971 475, a shortfall of almost half a million dollars just for having waited four years. Moreover, you would have to part with almost fifty percent more cash to get to the same point, at retirement, as a clever student who started investing a mere four years earlier. This is perhaps the most important point of this article. Investing relatively little early in life is worth VASTLY MORE than investing a lot later in life. One should also consider just how much harder it is to make money by working than it is to do so by investing. When you work, you have to get up in the morning, get to work via your slow transportation method of choice and actually spend a full working day at your place of employment. Ideally, that time will pass quickly as you provide a labour of love at your childhood dream job. Realistically, there will probably be many days when you would rather be sleeping, regardless of your employment. Your investments, on the other hand, will continue to grow as you sleep, go sailing, enjoy long romantic walks on the beach and take in a Broadway classic (activities which either directly or indirectly cost you money). And just in case that was not enough to convince you of the advantages of investing over working, our good governments designed a tax system that heavily favours investing; one that taxes the man confectioning haute cuisine at your local McDonald's restaurant more harshly than the wealthy businessman who enjoys reading his Wall Street Journal while touring the Caspian sea aboard a cruise liner. When working you lose a portion of your earnings to income tax. Another chunk of your salary is donated to the Canada Pension Plan (CPP) so that you may receive a meagre government pension when you retire. Another slice of your income is retained for the federal Employment Insurance (EI) plan. As well, if you are a resident of the province of Ontario, you will also have the pleasure of paying the new Ontario Health Premium. The money you make while investing, on the other hand, is generally taxed at much lower rates. As well, you will pay neither Canada Pension Plan nor Employment Insurance premiums on this revenue. Similar taxation systems which heavily favour investing exist to some degree in the United States, the United Kingdom, and in many other parts of the world. The moral here is that investing can be extremely lucrative over the
long run, should be started as early as possible, is easy to do and must
be used in combination with employment income to create a wealthy future.
Read on to find out how to invest as a student starting today! Article
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