How Students can Get Started with Saving and Investing

After the COVID-19 pandemic, inflation increased and caused our monthly expenses to rapidly rise.  Around twenty to thirty years ago, it seemed easier for people to get a degree, find a job, and live a comfortable life on one income.  Now most people need at least two incomes to afford everyday expenses such as rent.  In an expensive world, what can a student do to start saving and investing early? Most people think that to invest you need to be rich, but there are many ways students can invest with small amounts of money.

Even if you earn minimum wage, you can still invest.  Investing isn’t something that requires a large amount of cash up front.  According to Scotiabank, if an investor were to contribute $200 monthly for 15 years with a rate of return of 5%, they would end up with $53,181 when it matures.  This is just an example, but it shows that you don’t have to be rich to invest.

First, it’s probably a good idea to open the right types of accounts as a student.  There are two main types of accounts: chequing and savings.  Chequing accounts are used for frequent transactions such as daily expenses, monthly bills, and are usually where most people deposit their paychecks.  Savings accounts usually offer an interest rate, which is the rate at which you earn interest on the amount in your account.

Most banks in Canada offer student chequing accounts that come with many benefits.  For example, TD’s student chequing account offers a $0 monthly fee, unlimited transactions, no transfer fee, and no monthly fees for overdraft protection.  This is a good first step because a student chequing account will eliminate monthly fees that exist in normal chequing accounts.

The next account most students open is a savings account.  TD says that a savings account “can help you achieve short, medium and long-term goals like a vacation, school expenses or an emergency fund.” Most banks offer different types of savings accounts with different interest rates or minimum deposits.  Choose the one that aligns with your financial goals.  You can also ask a professional at your bank to provide you with more information.

To invest, you’ll have to first make an appointment with your bank to open a special investing account.  As stated by Scotiabank, there are many types of investing accounts, but most students prefer opening a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP).  There is one main difference between a TFSA and an RRSP.  In an RRSP you can get a tax reduction on your taxable income as you contribute, but you get taxed when you withdraw your money.  In a TFSA you don’t get the benefit of a tax reduction, but you don’t get taxed when you withdraw your money.  Both accounts have their pros and cons, but your financial advisor can provide you with more information to best suit your needs.

Once you have all your accounts open, ask yourself the following questions: What are your financial goals? Do you want to invest for a long-term or short-term? What is your risk tolerance? These are all important questions to think over to reduce confusion when choosing an investing option.

First, let’s talk about low-risk investments.  There are a few low risk investing options such as, Guaranteed Investment Certificates (GICs), term deposits, and Bonds.  According to Government of Canada, “Guaranteed Investment Certificates (GICs) and term deposits are secured investments.  This means that you get back the amount you invest at the end of your term.” Bonds are also a safe investment.  As explained by Vanguard, “by buying a bond, you’re giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date, and to pay you periodic interest payments along the way.”

On the other hand, if you’re up for some risk you can buy individual stocks of companies.  Stocks can give good return but there is always a risk that if the company does not perform well, you could lose money.  There are also mutual funds and Exchange Traded Funds (ETFs) which are a bunch of stocks and bonds put into a single fund to help diversify risk.

Overall, investing can be a little confusing at the beginning, but there are a variety of options available depending on your goals.  The earlier you start saving and investing your money, the more return you’ll get in the long run.  If you’re interested in learning more about investing, you can register in FNCE 249 at Athabasca University.