Broke, But Not Broken: How Recent College Grads Can Invest
Student Loan Debt Doesn't Have to Be an Impediment to Build a Portfolio
You might think that the phrase “student loan poverty” is the title from some sketch on YouTube’s College Humor channel. But there’s not much funny about the financial albatross that faces college students today—a record high that has just hit an even higher level as you finished reading this sentence.
A Generation in Debt
A student loan debt clock on the FinAid.com website, which updates itself every few seconds, is right now closing in on $1.46 trillion.
For college grads hoping to invest, the repercussions are harrowing. A survey of 5,000 current college students released in 2016 by Allianz Global Assistance reaches this conclusion: “Student loan poverty” is all too real, and may not end soon. After tuition, about one in four students reported not having extra money to spend. Nearly half (44.6 percent) are paying for their education entirely—and some 12 percent don’t even know how much they owe.
You don’t even have to bother crunching those numbers: Just chew on them for maybe a minute. Now, see if you can figure out where college students can find any money to invest in stocks without robbing the already scarce budget for mac and cheese.
The Allianz survey reveals that of those students who have student loans and know the balance, 40 percent owe at least $30,000. That’s consistent with figures compiled by the Institute for College Access and Success. For the Class of 2014, the debt figure per student hit $28,950 per borrower, with seven out of 10 students owing money. Over the last decade, student loan debt has grown at twice the rate of inflation; tuitions have risen at roughly the same rate going back 40 years. By many estimates, the per-student debt figure has surpassed the $30,000 mark.
So finding something—anything—for college students and recent graduates to invest in must be a hopeless cause, correct? Well, not exactly. Granted, the road is mighty tough to hoe. Go on to medical or law school, and your debt figure can easily top $100,000.
Yet it’s still possible to start sending a portfolio, experts contend. It’s matter of making it a priority, even if the starting cash amounts are minuscule.
One popular way to do this is through smartphone investment apps such as Acorns. ( Its founder, millennial Jeff Cruttenden, hit on the idea while still in college himself.) Acorns take whatever you spend from linked credit and debit card purchases and rounds it up to the nearest dollar. The change gets invested in six different funds based on risk tolerance. It’s especially targeted towards young investors wary of brokerage houses.
Another way is via online investment sites such as Betterment. Founder Jon Stein’s website follows a straightforward path where you enter your age and one of five general investment goals (i.e. “build wealth,” and “safety net”). It then invests the money in a combination of stocks and bonds: a fully diversified investment portfolio of 12 global asset classes.
“Betterment is a great platform for young investors to get started,” says David Weliver, founding editor of MoneyUnder30, a personal finance and investment website for millennials. “It has no minimum investment and it's easy to make small, monthly investments via direct deposit.”
Get That Employer Matching
There is the strategy of scouting new jobs carefully for benefits. Or if you need an attention grabber, how’s this? FREE MONEY! It's available in many workplaces, even if a free lunch isn't.
“Millennials with jobs that offer a 401(k) employer match should participate to the extent needed to get the full match; this is essentially free money for retirement,” says adds Anthony Criscuolo, a certified financial planner and portfolio manager with Palisades Hudson Financial Group’s Ft. Lauderdale, Florida office.
Setting up a 401(k) or individual retirement account (IRA) marks an absolute investment essential for young workers. Yes, paying off loan debt is important. But putting aside money each year for retirement, especially if you start at age 21 or younger, sets you up for quite the nest egg in retirement. In fact, you can turn $45 a month into $1 million simply, if you know the laws of compound interest.
Let’s say someone age 20 begins plunking down $45 a month with a 50 percent company match. If she raises the contribution by the same amount as any pay raises she receives, she’ll have more than $1 million by retirement—assuming 3.5 percent annual pay increases and an 8.5 percent return on 401(k) investments.
“According to a 2014 report by the American Benefits Council, nearly 80 percent of full-time workers have access to employer-sponsored retirement plans,” says James Capolongo, head of deposit products and pricing at TD Bank and based in Mount Laurel, New Jersey.
Tighten Your Belt and Invest What You Save
There’s also the question of freeing up money—and yes, we’ll spare you the speech about the daily Bigbucks latte. Big decisions, as well as small ones, can free up money, though some are hard to overlook. If you choose to take a job in San Francisco, for example, you’ll probably get paid more—but you’re also going to pay more in rent. A lot more.
Statistics compiled by RadPad, the mobile apartment search and rent payment provider, show that the city of the Golden Gate requires golden coffers just to find a place to hang your hat.
Entry-level workers will spend 79 percent of their incomes on rent in San Francisco and in New York, you’ll spend 77 percent of your entry level income on nothing fancy: a one-bedroom apartment going for the median price of $3,000 a month.
Taking a job in Austin, Texas, by contrast, means just 36 percent of salary goes towards rent. And no recent grad in their right mind is going to accuse Austin—one of the world’s great music cities and home of the South by Southwest music festival—of being a boring place to live.
Some of this also means creatively thinking about the expenses you already have in terms of rate of return. If you hire an accountant to do your taxes, for example, someone with more resources and a greater skill set may be able to snag you a bigger refund, which could more than pay for an increased hourly rate. And if you're in the position to refinance student loans at a lower interest rate, you'll be putting much more money back in your pocket over the long haul.
Finally, there’s always the notion of, indeed, educating yourself.
Great investment advice can be found all over the Internet, and there are, if you will, a wealth of reputable sources. Maybe you can't afford to hire the financial advisor your parents use, but you can certainly read his blog... or even arrange for a one-time meeting to go over your situation and figure out some goals.
“While paying for financial advice may seem out of reach, even young professionals should strongly consider at least a one-time consultation with a financial professional,” Criscuolo says. “Just as you entrust your health to a doctor or your car to a mechanic, a check-up with a financial pro can pay for itself in establishing a sound long-term financial plan.”