Students: take note. If you want to avoid financial grief in your future, start investing as soon as possible. Why? According to a 2019 survey by TD Bank, two-thirds of Canadians regret not having started investing at an earlier age, while a U.S. poll found 77% of millennials—and 69% of Gen Z respondents (age 18 to 22)—wish they had started investing sooner. It’s understandable, given that even small investments can grow into large nest eggs over time due to the power of compounding. But before you run off and become a student stock trader, there are a few investing basics you should understand. Here are the best ways to invest as a student.
Best Ways to Invest as a Student
While you might be putting off investing until after you pay off your student loans, take a look at your budget to see if you can afford to do both. Start by putting aside even a small amount each month to get yourself into the habit of saving and investing. Do the same whenever you have an extra bit of cash flow, such as a tax refund, monetary gift, or a seasonal paycheque bonus. Instead of spending this “found” money on an immediate indulgence, such as a new outfit or a phone upgrade, “treat” yourself to some investment purchases. Your future self will thank you!
If you’re eager to learn how to make money as a student, start with these seven steps:
1. Buy Canadian blue-chip stocks
While I wouldn’t recommend trying to buy and sell your way to wealth as a student stock trader, there are certainly some companies you can invest in that are safer bets than others, especially when you look at their performance over the long term. Large Canadian banks, for example, are probably not going out of business any time soon and will likely continue to be profitable for the foreseeable future. Such stocks also pay dividends, which is monthly or quarterly investment income you receive in addition to the increase (or decrease, as the case may be) in the value of your purchased shares, which means more money for you.
To buy individual dividend stocks (or any equities, for that matter), you’ll need to open a brokerage account. An advisor at a full-service brokerage can place the trades for you, but that usually comes with hefty commission fees. If you want to pay less in fees, choose an online discount brokerage, such as Wealthsimple Trade or Questrade, which charge less because you place the trades yourself. Now is a great time to sign up because Wealthsimple Trade is offering Young and Thrifty readers an exclusive deal: get a $100 cash bonus and $0 commission trades when you open a new Wealthsimple Trade account. All you have to do is deposit and trade at least $250. Limited time only until April 30th.
2. Invest in ETFs
As mentioned above, it’s risky to try to “beat the market” by choosing individual companies or organizations to invest in. The vast majority of professional fund managers in Canada don’t even consistently outperform the market with their curated mutual fund offerings (despite taking, on average, about 2% of your investment earnings as payment for their services).
Instead, it’s safer to try to match the overall performance of the market through exchange-traded funds (ETFs), which allow you to maximize your returns through lower fees. (A number of the funds listed in our Top Seven ETFs for Young Canadian Investors have management fees under 0.1%.)
ETFs are like a basket of investments made up of all the shares in a particular market or index. An S&P 500 ETF, for instance, holds shares in the hundreds of companies (from across all industries) listed on the S&P 500 index, providing a reasonably good proxy of the U.S. large-cap equities market. To lower your exposure to risk even further, it’s best to invest in a diversified portfolio of ETFs that track many different markets (including Canadian equities, Canadian bonds, international equities, etc.), so if one market temporarily tanks, you will still hopefully see gains in the others.
You can even purchase asset allocation ETFs that hold investments in all these areas in set proportions (say, 60% equities and 40% bonds). These “all-in-one” ETFs automatically rebalance your holdings regularly to ensure you maintain that specific asset allocation, making them a low-fee (around 0.25%) no-nonsense investment solution.
3. Sign up for a robo-advisor
If you prefer a hands-off approach to your investments, a robo-advisor service such as Wealthsimple will create a diversified portfolio of ETFs for you, choosing funds based on your investment goals and risk tolerance. You can even set up automated transfers that make it easy to invest a little bit each month. Robo-advisors cost slightly more than going full DIY at a discount brokerage but are still cheaper than investing in mutual funds.
4. Buy low-risk GICs
If, on the other hand, you want to earn a set rate of interest and take zero chances that your investment will decrease in value, a Guaranteed Income Certificate (GIC) could be the ticket. Of course, taking the safe bet means you forego the possibility of higher returns that come with riskier investments that fluctuate in value. But you’ll still earn more interest than a basic bank account will provide. EQ Bank, for example, is currently offering a 3-month GIC that pays well above the rate of inflation and most high-interest savings accounts.
5. Look for fixed-rate bonds
For generations, Canada Savings Bonds were the classic initial investment product for young Canadians. And with good reason: they could be purchased in small denominations and guaranteed a high rate of annual interest until the bond’s maturity date. As interest rates declined, however, Canada Savings Bonds lost favour and were eventually discontinued.
These days, it’s tough to find government bonds that offer a decent rate of return, but you can sometimes find community bonds issued by reputable non-profits, charities, and co-ops that do. To reap the rewards, you’ll need to keep your money invested in the bond for a specified period of time, often five years or more, so that’s a consideration if you think you might need to tap into your investment funds in short order.
6. Consider peer-to-peer lending
If you want to invest in small businesses, you’re not going to find them on the stock market. Typically, only very large companies “go public” by listing their shares for purchase on a stock exchange. One way to invest in small businesses is through a peer-to-peer lending website, such as Lending Loop. These platforms match would-be investors with small businesses looking for loans. They screen the businesses and give them a loan rating, which determines the interest rate you’ll receive on your investment. Because small businesses often fail, however, these types of investments can carry more risk—so be sure only to invest money that you are okay to lose.
7. Open a high-interest savings account
Sometimes you have money that you don’t need right away, but will likely spend in the near future—say, to pay for the next term’s tuition. In the meantime, a high-interest savings account is a good place to park those funds. You’ll earn some interest for now and can withdraw the money whenever you need it. For example, the Savings Plus Account with EQ Bank offers 1.50%* annual interest on all deposits—which is more than many of the big banks are now paying on their basic savings accounts.
*Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.
Pitfalls to avoid
Many investors make mistakes when they first get started, which is another good reason to begin investing when you’re young and the stakes are lower. Having said that, there are a few major pitfalls you should look out for:
- Don’t try to beat the market. As previously noted, a passive investment strategy is not only simpler but also offers better returns with less risk. Timing the market is a wasted effort.
- Avoid credit card debt. If you are carrying a balance on a credit card or have any other high-interest debt, it’s best to use whatever savings you have to pay off the debt before starting to invest. That’s because these forms of debt often charge over 20% annual interest, which will put you into a hole that no investment strategy can dig you out of. If you have a lot of credit card debt, consider getting a debt consolidation loan or a balance transfer credit card.
- Don’t forget to use registered accounts. When you file your annual income taxes, you must report and pay tax on all your earnings – including interest and investment income. But you can avoid this tax hit by sheltering your savings and investments in a registered account such as a Tax-Free Savings Account or Registered Retirement Savings Plan. Read more about the TFSA vs. RRSP to determine which type of account is best for you, as well as the contribution limits. Either way, a registered account will keep more money in your hands instead of the Taxman’s.
Saving is a habit that must be nurtured, and investing is a skill that needs to be learned. By starting to save and invest even small amounts while you’re a student, you will not only develop a strong savings routine but also become familiar with the ins and outs of investing while you’re still young. Plus, you’ll have created the beginnings of a nest egg that will snowball over the coming decades, so your future self will have no regrets.