Everyone knows that person. That person who spends money carelessly, who makes purchases impulsively, who decides to embrace his or her immediate appetites over long-term interests. That person may be your friend or your sibling, your sorority sister or your coworker. That person may be you.
But we want to call attention to a distinctive kind of person: that person who buys a cup of Starbucks every day.
Now we understand this is college and coffee is often a necessity - the stimulating effects of the caffeine enable us to make it through the day. Though is it really all that necessary to always go to Starbucks?
Think about it: How much does that coffee cost?
Well, a tall Caf?(c) Latte costs $2.95. Including tax, let's round that up to a solid $3. OK - so many people will think, "$3 for a cup of coffee, big deal." Well, let's consider the exponential effects of spending $3 on Starbucks, seven days a week for one year. That's $21 a week. That amounts to $1,092 spent on Starbucks in just one year. And that's assuming you buy the smallest size each time.
One thing we have learned through our time at UB is that free coffee can always be found somewhere at this university, especially if you work a job on campus. But even if you can't find free coffee somewhere, you could have made a cup at home - for substantially less money, if any at all. And let's just think, what are some other ways you could have spent that $1,092 that would have been more beneficial?
Let's say you decided to invest it.
Hang with us now.
If you put that $1,092 into a mutual fund with a moderate rate of return, call it 8 percent, that you compound monthly, in 50 years that amount you spent at Starbucks would be $58,834.98.
That is what comes from the power of compounding.
Compounding is essentially interest that is earned on top of interest. So, if you invest $1,092 and make 8 percent in one year, you will then have $1,182.64. If you continue to invest the money you made on your return, your investment is no longer making 8 percent of $1,092; you are now making 8 percent of $1,182.64.
And so it builds, more and more, accumulating over time.
One of the biggest benefits we have as college students is the number of years we have to compound our returns. This is the benefit of early investing.
The point of the Starbucks example is not to suggest anyone is a fool for buying a cup of coffee; the point is to draw attention to how college students should be conscious of how they spend their money. And to also think about ways that wasteful spending can alternatively go into savings and personal investment.
Every student has his or her own financial habits and everyone certainly has the right to spend their money how they want. But we want to urge UB students to be cognizant of the value of investing now and the benefits of taking a certain amount of money to be regularly allocated into savings.
For instance, every student could probably find a way to put aside anywhere from $10 to $25 a week. That small amount adds up over time and can later contribute to your investments.
Saving just $25 a week accrues to $1,300 in a year that you can put toward long-term growth - instead of coffee that will have left you long ago.
Investing is a way of making your money turn into more money. Though it may feel painful putting some away that you would rather spend now, it will turn into more wealth down the road - and will benefit your future.
There are many different routes one can go about doing this, but we recommend setting up an investment account with an online discount brokerage - like Charles Schwab, Fidelity, Merrill Edge, etc.
These outlets provide account opportunities with low minimums and no monthly fees. (Merrill Edge requires no minimum amount to open an account.) And these are brokerages where you can invest in stocks, bonds, mutual funds, etc.
We like stocks, but they are generally higher risk; we like bonds, and they are generally a safer option, but they tend to appeal more to older investors.
Our favorite investment option for college students is mutual funds.
A mutual fund is a professionally managed financial instrument that collects investments from many investors to purchase various types of securities. We think they are appealing because they offer simplicity, variety and diversification.
They limit options and allow you to choose a specific type of fund (like stock funds or bond funds) and they are easier than choosing from the thousands of available stocks or bonds. The fund itself invests in many securities.
Basically, they give you fewer ways to shoot yourself in the foot.
Fund managers direct these funds and consider what kind of results they expect through the various kinds of investments they make to give investors the automatic advantage of diversification.
Most mutual funds do require a minimum initial investment, but after that, you can make any other purchase you want for whatever price you want.
Mutual fund purchases can be made monthly or quarterly. One strategy we recommend is what's called Dollar Cost Averaging - where you keep purchasing the same investment periodically to make the same returns on your investments consistently.
So for instance, you would put something like $500 into a fund one month and then do it again the next month in order to keep making the same return.
The biggest problem we have heard from our fellow students is that they would save if only they knew how. Along with opening an investment and savings account, students should consider seeking out the advice of a financial advisor and should take an active role in educating themselves on financial matters.
There are also some books we recommend checking out, like The Millionaire Next Door: Surprising Secrets of America's Wealthy,by Thomas J. Stanley and William D. Danko, and Dave Ramsey's Complete Guide to Money: The Handbook of Financial Peace University by Dave Ramsey.
Finance can be complicated to wrap your head around and the key at this stage of the game is just finding ways to keep it simple. What matters is that college students don't just live in the moment; it is important to make decisions with the bigger picture in mind.
Eventually, you might have a family and children whose college tuition needs to be paid. Eventually, you may retire and need money that is set aside to sustain you during those years - be aware of how controlling spending habits and saving now will make a difference for those years. Remember how, due to compounding, failing to start saving during your early years will likely render you having difficulty trying to catch up.
All you have to do now is start making small investments consistently. And then, every once in a while, you can reward yourself with some Starbucks.
Email: editorial@ubspectrum.com
