Making the most of that Student Loan

Anthony
Anthony
Aug 25, 2017 · 7 min read

Three times in every academic year an amazing opportunity presents itself to students that isn’t just an available computer in the library. Three times a year Student Finance England deposits a predetermined amount of money in the bank accounts of hundreds of thousands of students across the UK.

Often maintenance loans are in the regions of the thousands of pounds. It would be inaccurate to describe this opportunity as free money as the three instalments are what they say on the tin: loans. However, what makes student loans special is the exceptionally low level of risk that comes attached to them.

As this is often the first time in their lives that many students have total control over this level of liquid assets the temptation to splurge on clothes, food, and partying is tremendous. However, what this often results in is just a battered liver and softer waistline. I would implore any student to not go down that [foolish] route that I, and many others, went down.

This money would be much better off invested and if you continue reading you’ll learn how you can do this for yourself.

Never put all your eggs in one basket!!!

This isn’t just a poignant saying but it is the foundation upon which smart investing is built. What that means in practice is that you’ll never want to put all your money into just one asset or even just one asset class. You must spread your money over different asset classes as insurance policy against a drop in value in any one asset class. I’ll touch more on this shortly.

Let’s say you’re starting your first year at uni, you’ve enrolled on your course and physically attended one lecture. You wake up one morning to find £2,000 has been deposited in your account. You could go down to local Gucci store, purchase three items and spend the next three months eating tuna sandwiches minus the tuna to survive. Alternatively, you could decide to make your money make even more money.

In this scenario, I would take 30% of the total loan and put it aside for investing leaving you with £1,400 of spending money.

We now have £600 to invest in whatever we please. Common advice in finance circles is to split your investment portfolio into three thirds. Encompassing; equities, property, and fixed income. And in this example, that means we have £6 left over per term for any takeaway of our choice.

Equities

What is it?

Equities are another way for saying shares of publicly traded companies. A publicly traded company is a company that has shares that anyone on earth is free to buy for themselves, as long as you have the coin. If you’ve ever heard of the FTSE 100 in passing that is a list of the UK’s 100 largest publicly traded companies and includes the likes of BP, Shell and Sainsbury’s.

Benefits

  • Historically, equities have provided the best returns compared to other asset classes
  • Certain companies have an established reputation for regularly paying dividends. Which are pay-outs given by companies to shareholders as a proportion to an individual shareholding
  • Equities are so varied that not every business suffers in times of financial crisis, whilst one industry may falter another may flourish
  • Many companies pay annual dividends which can provide an excellent flow of cash

Drawbacks

  • In times of financial crisis equities tend to slide downwards
  • Annual dividend payments are not guaranteed and is dependent on company performance
  • In the event that a company does collapse shareholders don’t get first dibs upon the dissolution of the company’s assets

How do I get involved?

Perhaps the best way for a student to start investing in the stock market in through a managed stocks and shares ISA. A stocks and shares ISA is a portfolio of stocks across a range of industries.

With this kind of ISA investment decisions are made on your behalf, alleviating the pressure that comes with making a good pick. The value of a managed will tend to go up and down in accordance with the FTSE 100 index (remember that?). A list of such funds can be found here.

Alternatively, you can invest in an unmanaged stocks and shares ISA, as you can guess from the name the main difference is that you, not an investment manager, oversee the investment decisions. Of which you can find a list of providers and their benefits here.

The whole point of an ISA is the tax benefit it provides. If you don’t invest through an ISA then the price rises in your shares when you decide to sell will be subject to something called capital gains tax which currently stands at 18% if you’re a student.

However, if this doesn’t matter to you if entirely possible to invest in the stock market without an ISA. You can trade with an ordinary brokerage account. An investment broker is the platform (traditionally it was one individual) who will fulfil your stock order on your behalf in exchange for a commission of the total purchase price. You can trade either on your laptop or an app. 212 for instance is a popular platform. However, it’s best to shop around as different brokers offer different rates of commission and minimum investment amounts.

If you do insist on managing your own stock portfolio I would implore you to do two things. Firstly open a demo trading account to test how everything works and secondly to read The Intelligent Investor by Benjamin Graham. Admittedly, it is not the most riveting read. However, it provides the perfect springboard for someone who is looking to get into investing in the stock market and I would go as far as to say that it is essential reading

Bonds (Fixed income)

What is it?

Bonds, also known as an IOU, are debt obligations issued by corporations and governments as a way to raise money. It’s debt that is available to buy on open markets, via a broker of course. UK government bonds are known as Gilts. So for instance, the government, known as the issuer will make £100 10 year bonds available to the public. When you purchase a bond the government now owes you money, plus interest. Assuming an interest rate of 10% each year you’ll receive £10 back in bi-annual repayments. At the 10 years you will receive your originally £100 pounds back and you would have accumulated £100 profit from the interest.

Benefits

  • Offers a diverse choice from stocks
  • Government bonds of AAA rated countries are notoriously safe investments
  • More frequent payments compared to annual stock dividend

Drawbacks

  • Like the interest offered by savings accounts the value of bonds are affected by external factors such interest rates and inflation
  • They are technically higher risk as you’re locked into an investment for an extended
  • Likewise, with other assets if you sell your bond before maturity there is no guarantee that you’ll get more than what you paid for it
  • Some purchases require you to have a minimum amount and there is a commission for every transaction

How do I get involved?

Gilts and bonds can be bought either through banks or brokers.

You can open an account though Hargreaves Lansdown from as little as £1 and you will have access to a range of funds. I’d advise anyone who does this to speak with the brokers over the telephone so they can get a feel for your investment goals and appetite for risk.

http://www.hl.co.uk/shares/corporate-bonds-gilts

Property

What is it?

I’d imagine the vast majority of people know what property is and are aware of how it’s used as an investment vehicle. You might be reading this right now and trying to fathom how £600 a term is enough to invest in houses that cost £100,000 and upwards. You’d be right in thinking it’s impossible. Even if you did have the money available the Bank wouldn’t provide a mortgage because you’re a student without a full-time job. Luckily there is another, much more cost-effective way to invest in property. Again, in the form of an ISA.

Property ISAs work in a slightly different way to stocks and shares ISAs. If you invest £100 into a property ISA the money is pooled with money from other investors to invest in a property. The rent is then distributed amongst the investors proportional to how much they invested in the first place. So if the property produces a rental income of 7% and you invested £1000 you would receive £70 for the year. Far higher than a cash ISA would produce.

Benefits

  • A great way to benefit from rental income without having to own or manage a property on your own
  • Having your money in property offers some protection against rising inflation. So even if your Bond holdings do suffer you can offset the damage (see how useful diversification is)
  • Property prices are typically more stable than share prices
  • As it is an ISA your earnings are tax free

Drawbacks

  • This is an illiquid investment meaning that your money may not always be available for instant withdrawal. It’d be best practice to not put money you may need immediately in this kind of fund
  • Property can take a long time to sell if you do want to take your money out by the time the fund has found a buyer the price has ample time and space to plummet. Something to keep in mind
  • Platforms will typically charge a management fee which means slightly less profit for you

How do I get involved?

Bricklane is a company that has featured in The Times and offers Property ISAs as well as a stock and shares ISA. They offer funds by the region which is significant because often different housing markets in the UK can sometimes exhibit different price behaviours. Their property ISA charges a management fee of 2% plus an annual management fee of 0.85%.

https://bricklane.com/

In order to execute the above or something similar sacrifices will most likely have to be made. You may have to get a part time job to make up for the immediate shortfall in cash — which is a better option than selling one of your major organs. You must take some of your time to read and familiarise yourself with the markets that you’re interested in, you might also have to live like a monk before your investments really start to bear fruit. It’s also a matter of your appetite for risk, if you have none you’ll be better off putting your money in a savings account where inflation will slowly erode it away like your milk in the fridge that you told your housemates not to touch.

If you do have the appetite for risk, however, then investing is a great thing to get into. Not just for the cash returns but for cultivating the habit of investing, putting something away regularly and owning something! Now that is priceless.

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Anthony

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Poetry is music of the soul.

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