Maybe you went a little over your budget during spring break. Maybe you never paid off your credit card debt from the holiday season. Or maybe you're a senior who's starting to get anxious about having to pay off those student loans after graduation.
There are many reasons why a college student may feel strapped for cash - in fact, according to a 2000 Harvard Law study, people younger than 25 became the fastest-growing group to file for bankruptcy in the late 1990s. Is investing the answer to the debt woes?
Some would answer positively. According to a survey conducted by Student Monitor, a marketing firm that studies young adults, 23 percent of college students own savings bonds, 13 percent own individual stocks, 11 percent have bonds, and seven percent participate in mutual funds.
The study showed that students are entering into these investments on their own: though they said savings bonds were mainly gifts from family members, 40 percent of students polled said they decided to buy stocks themselves, 42 percent entered mutual funds on their own, and 48 percent got into money market funds on their own.
Not everyone believes college students should be investing, however. Economics Lecturer Christopher McHugh pointed out that there are two different schools of thought when it comes to this issue: one is "the pious, conservative approach - that people should save and save and save, diversify, and practice 'dollar-cost averaging,'" McHugh said.
The second approach to this subject is "the iconoclastic - that there is no reason to save at a really young age, the future is not that poor, that people diversify too much, and that there is no 'magic of compounding,'" he said.
Assistant Economics Professor Edward Kutsoati belongs to the first school of thought. "If you care about consumption when old, and I believe most students do, then it's always a good idea to start saving and investing early," he said. "By investing early, you also benefit from the power of compounding - you gain interest on your interest earnings."
McHugh personally thinks the latter approach is better, however. "Of course, it depends on your preferences and your outlook on life, but I would say the answer for most college students is, 'No,'" he said. "It's too early to save. You probably don't have sufficient money to do it efficiently. The so-called 'magic of compounding' is not valid."
McHugh mentions, however, that some students may have reason to invest. "If, for example, you knew that you would be married at age 24 and would need a house right then, and have absolutely no savings right now, you obviously have an immediate, acute need to save for the house down-payment," he said.
Otherwise, McHugh advises waiting until "you can devote a few thousand dollars per year. This will probably be when you start your first real job - not a low-paying job between college and graduate school," he said.
Though Kutsoati believes that it's good to get an early start, "[He] must also say that education is an investment, and the returns from investing a dollar into education may be higher than investing that dollar in a mutual fund or a stock.
"The same goes for debt - if a $100 debt invested in education can make a big difference in your GPA to give you a good career, then you'll earn more than enough to pay off the accumulated interest charges on the $100 loan," Kutsoati said.
"I think as a student, your studies are more important than day trading," Kutsoati added. "In any case, regardless of what you do, do the research first."
Kutsoati cautions, however, that "getting a deeper knowledge takes time," and encourages interested students to take the Economics Department's financial economics class or the ExCollege's basics of investing class.
For students who would like to invest but have minimal time to devote to researching, Kutsoati recommends index funds. "These are well-diversified funds that mimic the broad market - say, the S&P 500," he said. "They also have the advantage of low management fees, and tend to do well in the long run."
McHugh said that index funds and mutual funds in general are pretty safe bets, even for students with little financial background. "You don't need to know much, if you start out with mutual funds," he said. "Pick a mutual fund with low costs and no load. It can be an index fund - tracking some piece of the market - or some general fund with a reasonable track record."
Students can also customize their own mutual fund. "Pick five to 10 basically sound companies and buy their stocks," McHugh said. He warns, however, that students should not put all their eggs in one basket. "You don't want to make too concentrated a bet - don't buy all internet companies, or all telecom companies," he said.
"I think the market is 'efficient;' prices of stocks are about right," McHugh added. "Therefore, if you stay away from fringe stocks, like penny stocks, you have lots of help in that everybody else is watching stocks for you."
Kutsoati offered some tips for indicators students can watch themselves. "There are many things that you want to look for," he said. "For example, a firm's price/earnings [P/E] ratio is a useful guide. Loosely, this tells you how much you're paying now for each dollar you'll receive in future.
"If the P/E ratio is very high, then you may be paying too much for the stock," he said. "In that case, find out if there's more to this firm - new discovery, new patent, etc."
"For the long run, some simple rules may apply," Kutsoati said. "For example, since risky assets - stocks - outperform safe ones - bonds - in the long run, a good strategy is go long on stocks when you are young, and slowly move the portfolio into safe assets as you near retirement.
"In addition, you may use a cost-averaging technique, whereby you buy the same dollar amount of your portfolio in each period, monthly or quarterly," he added. "This way you get a bit of both worlds: when price of the stock falls, you buy cheaply. When the price rises, your portfolio gains.
"Finally, depending on where you end up a few years after graduation, you might want to consider real estate," Kutsoati said. "First, it may be better than renting. Secondly, some real markets - Boston, San Diego - have outperformed most stocks in the past several years."
