One of the greatest financial gifts a new high school graduate has is not money but time. An 18-year-old who invests — even a small amount — is not only getting into a good habit, but he or she can tap the power of compounded interest. If you think 18 is early to get started investing, Warren Buffett reportedly bought his first stock when he was just 11 years old.
Here are four tips to help incoming college freshmen make the most their money:
1. Don’t take out more student loans than you need: Student loans have lower lending rates than other kinds of loans, making it tempting to take out more than you need. But try to imagine your future self in five years and in your first job. Someone holding $50,000 in student loans can expect to pay almost $500 a month to lenders — which means needing an income of around $40,000 to $50,000 to cover all expenses on a budget. And remember, for now student loan debt cannot be discharged in bankruptcy.
2. Be smart with budgeting and credit: The absolute most important thing to do each month is cover your costs. It’s a good idea for parents to co-sign a credit card in high school — if it can be paid in full each month. When managed properly, a credit card can be a good thing and help build a good credit score. Do some research on the best cards out there for new card holders. You can compare cards at NerdWallet.com.
If you can’t cover your credit card balance and miss a payment, a credit card might not be a good fit. Missing payments is not just a budgeting setback — it will also hurt a credit score. If you need additional tools to setup and manage a budget, you can use apps like Mint.com or YouNeedABudget.com.
3. Supplement your income: Many students get jobs while at school. During college, Betterment CEO Jon Stein worked at a hamburger joint. If a set work schedule is hard to manage with classes, study and homework, there are companies like TaskRabbit that will allow you to pick up small work whenever you are free. UrbanSitter is an app that helps connect babysitters with local jobs as well.
4. Invest your money: Invested wisely, high school graduation money can turn into a solid little nest egg down the road. For example, start with a $500 investment and contribute the equivalent of one date night a month (say $50) to the account. In a basic investment with expected returns of 6 percent¹, your savings can grow to fund a nice European vacation in five years (around $4,000) or be the basis for down payment on a house in 15 years (around $15,000). Depending on your target savings amount and timeline, Betterment can advise you on exactly how much you need to save on a monthly basis to reach your goal.
¹A rate of return of 6 percent per year is an estimated long-term annual return for a portfolio like the one offered by Betterment with a 50 percent stock allocation, subject to the disclosure found here. This scenario assumes no fees, no allocation changes or reinvesting dividends, etc., and is a general estimation drawn from a compound interest calculator.