College students never seem to have a lot of money, becuase of this they are usually aching to get their first paycheck. While one might be tempted to spend money freely upon getting that first job, looking ahead and investing for retirement might be the better thing to do. Starting earlier can be the key to financial health in the distant future.
""If we have retirement on the brain, it makes us perhaps a little more likely to start a retirement plan a lot earlier,"" said Michael Gutter, UW-Madison assistant professor and family financial management specialist for the department of consumer science.
Though, students will be able to invest less money when they start planning for retirement, they will be able to invest more aggressively and may end up with more money than if they had begun investing later in life.
Time is a big component to consider when beginning to plan for retirement, which is a major reason why Gutter and other financial specialists suggest that people start thinking about it early on in life, even if it is hard for students.
""Even if you can't afford to contribute much, the power of time can turn a small investment into a substantial amount of money,"" said Jan Koopmans, customer service officer for National Exchange Bank and Trust.
Gutter explained that money and anything earned on investments compounds, or increases, over time. Time is also a factor in terms of the changing economy. According to Gutter, the U.S. stock market historically has grown at 10 to11 percent each year. Experts say this could drop to seven or eight percent a year, so more time will be needed to achieve a set financial goal than in the past.
If students have money set aside for retirement, it could also easily become a needed financial reserve for them in case of hard times.
""Perhaps the biggest thing people will consider about their future is not what is going to happen out in the world,"" Gutter said, ""but what is going to happen in their own lives."" He explained that money can be taken out of retirement investments in order to deal with life setbacks. He added that if people have any financial losses, starting retirement plans early gives them more time to make them up.
Though students may be aware that investing early for their retiremnt is a good idea, they may be uncertain how to begin. This is understandable since there are plenty of investing options to choose from.
Koopmans said Certificates of Deposits, Money Market Funds and Treasury Bills are relatively safe short-term investments. Gutter agreed but warned that things such as CDs and saving accounts lose purchasing power. He explains many of them only pay 1 percent in interest when inflation is 3 percent, ultimately not allowing students to earn very much back on their investment.
For long-term plans, while riskier, both Gutter and Koopmans suggested stocks as effective investment choices. UW-Madison senior Megan Karbula said she plans to watch and benefit from stocks that her dad invested in for her when she was young.
""Stocks have always out-performed all investments,"" Gutter said.
Gutter said a diverse stock portfolio is best. This ensures that even if one category of stocks is doing poorly, you will not lose all of your investment. This can be achieved by investing in a mutual fund, which is when different stocks are pooled together by investment companies that a group of investors can buy into.
UW-Madison senior Adam Olson hopes to get a retirement plan when he gets his first job. Koopmans said a great retirement opportunity is to contribute to employer sponsored, tax-deferred retirement plans (such as a 401(k)). One such plan is a salary-reduction plan. These plans let investors deposit a part of their pretax salary into an account that will not count as a part of their taxable income.
""The money is subtracted before you get your paycheck, so you are not tempted to spend it,"" Koopmans said.
Gutter said companies are more likely to keep these types of investment plans where the employee decides how to invest, since they are cheaper to manage than other employer provided benefits.
There are more options out there for students to explore. They can talk to their banks or seek financial advisors. Gutter suggests taking Consumer Science 275, what he calls a class revolving around students' personal financing.
In the end, students have to decide between the present and future.
""At the same time, I'm worried about school,"" Olson said. ""You got to pay for that first.""
