Should You Invest as a Student? (2022)

Should you start investing as a student? It depends on your goals. If you want to invest for retirement, you could start testing the waters as a student.

“Time in the market beats timing the market”. This means the longer your investing horizon is, the less money you have to invest to get a certain amount of money. If you started your investing journey as a student, chances are, your investing horizon is longer than someone who started later in their life.

There are some factors that we have to consider before we can determine if you should start investing as a student. The first one is student or other loans, and what are the interests. More about that below.

Even if you had debt, you could start to test the waters with a small amount of money. With just 100 dollars, you can get started and understand better how investing works. That 100 dollars won’t make you a millionaire, but it can give you a good image, how investing works. This way you are more likely to continue investing after graduating and getting a regular income.

Do you have debt and what is the interest?

If you don’t have any debt, feel free to invest any leftover money. However, if you have debt, student debt or other, you might want to take a look at interest.

Let’s do some calculations. If your debt has interest of over 5%, that means by paying off your debt, you will save that 5% every year, which is equal to a 5% return in the markets. By paying off that debt you basically get a 5% risk-free return for your money. Sometimes the debt can be even more than that.

If your student loan has a low or non-existing interest rate, such as one percent or less, you could invest that. Considering the markets have returned on average 8%, if the interest is one percentage, on paper you could end up 7% on profit if you keep your money invested long enough, and if the markets continue the annual 8% average returns.

woman writing on a notebook beside teacup and tablet computer

The difference between interest percentage and 8% expected annual return is the risk you are investing for. Let’s take the 5% interest example again. Would you rather take a 5% risk-free return, by paying off your debt, or risk it for the extra 3%?

I am no expert, but I would rather pay off that expensive loan first. 5% risk free sounds a lot better than risking it for a few extra percentages, at least for me.

On the other hand, if your interest is 1%, you would take the risk for the possible 7% on the table. Important thing to keep in mind is that 8% is not the return you will get every year. It is the average over decades. One year you might end up with -5%, the second +15%.

My student debt has interest of 0,3% annually. Because of that, I invested what was left after my living expenses. I am not in a rush to pay it back. If inflation is anywhere from 2 to even 5 percent. The money today is more expensive than it is a year from now. It will lose 2-5% of its value based on current expectations.

Should you invest your student loans?

This depends on what you are investing for and the interest on your loan. When investing with borrowed money, it always comes with increased risk and is not recommended, at least for beginners.

Another factor is interest, I would not invest with student loans, if they have higher interest than 2%. Even 2% might be too much for some, so if you want to play it safe, just leave the investing to your own money.

Investing with borrowed money, loans, debt, whatever you want to call it, always comes with a lot of risk. It is like using leveraged products, but instead borrowing the money.

With borrowed money, your position can basically go to negative for the amount you have borrowed. With leveraged products, they usually stop you out if your position goes to zero.

Final words

So, should you start investing as a student? I think the sooner you start, the better. However, if you have debt that has high interest rates, maybe invest just a little bit to test the waters. Investing with loans, no matter what interest rate, 0% or 10% always comes with additional risk.

Pay off the debt with high interest first, it is like risk-free returns when you pay off debt. If your loan interest is 5%, that is equal to a 5% risk-free return on your investment.

Other investing-related posts can be found here.

Hopefully this was helpful to you, have a nice day.

This is not investment or financial advice. Past returns are not a guarantee of future returns. Always do your research before risking your hard-earned money. Investing with borrowed money always comes with increased risk.