Financial literacy and investment knowledge aren’t reserved for adults only. There is no such thing as being too young to invest money. As soon as you are old enough to get an allowance and manage your personal finance, then you can be an investor, and be on your way to financial freedom.
Also, investing is not some obscure activity for old men or nerds who love Math. Due to the multifaceted nature of the investment world, virtually anyone with any sort of interest can begin and succeed at investing.
Thus, while in high school as a teenager, you should start thinking about building an investment profile. As a parent, you may want to diversify your child’s education by introducing them to investments as early as possible.
Instead of handing them your credit cards or debit card whenever they need some money, you can instead loan them the money to invest in individual stocks or shares of their choice.
Just like every sphere in life, there are things to note when investing as a teenager. Thus, this article gives an elaborate expose on how to invest as a teenager. It will serve as a useful guide both to the teenagers and their parents as well.
So, without anything further ado, let’s begin.
Why You Should Start the Investment Process as a Teenager
As an investor, if there was one personal financial advice I could give myself, it would be to go back in time and start making investments when I was younger.
Why? Because time is what allows compound interest to work its magic. Given enough time, you can take even just a small sum of money, invest it, and watch it grow to thousands or even millions of dollars as the years pass.
That’s one of the single, biggest advantages teenagers have over adults when it comes to investing. They are young and can use the time to leverage the benefits of compound interest to their advantage.
Take, for example, a teenager who works part-time all year and earns $10,000. If they were to invest that $10,000 in a simple fund that earns a 10 percent average return, then guess how much it would be worth after 50 years?
That’s right! For doing nothing more than letting your investment sit around and gain value, it has the potential to multiply 100 times over by the time you are ready to retire. That’s the power that compound interest can have! It significantly boosts your investment income.
You can try this for yourself using this simple calculator from Investor.gov.
Benefits of Investing as a Teenager
Learning Discipline Early
Parents are quick to notice the gains of teaching their teens about investing when it comes to saving money. No doubt, getting a nest egg early on is quite important. However, financial prudence is also another great benefit. When teenagers start early to learn and start investing, they build the experience needed to become excellent investors in the future. As a parent, this should be a legacy worth leaving to your child.
A strong benefit which a teenager gains from starting their investment journey at an early age is healthy savings. There is hardly any argument that can be made about how important making money through investments is. Generally, people who invest over a long period have more money to accomplish whatever goals they have.
For a teenager looking to get into college, the money from investments will be important for paying off college fees and student loans. Thus, even when they start to work after college, they would not have the burden of debts hanging over them.
Take Advantage of Compound Interest
Generally, the longer an investment lasts, the greater it is worth. Thus, if a teenager starts investing as a minor, the value increases over time.
What To Know Before Investing as a Teenager
Whether you are going solo into investing or are doing so with the guidance of your parents, there are certain fundamentals to note. They will guide you to find the right stocks or other investment paths to pursue. They will also help mitigate whatever hassles you will discover in the investment process.
Work With Your Parents
If you are in your teens and have the initiative to start investing, the first thing to do is speak to your parents or guardians. This article will be providing a faulty template if it does not highlight this from the start. There are legal rules regarding the appropriate age a teenager ought to start investing in in the first place.
Besides, no matter what your net worth is, you may require funds and support from your parents at some point. Furthermore, your parents may have the experience you require to thrive while investing. Thus, keeping your parents in the loop could eliminate the need to consult a tax advisor or contact brokerage firms.
You would need some form of financial education to make it as an investor. Thus, to get a head start, you may want to consume as many materials on the subject as you can. You may want to take a course on personal finance or financial planning. There are several sites you can access for that.
Furthermore, you could even go as far as getting an online broker or joining an investment platform to teach you the ropes and make the right investment decisions for you, especially at the beginning. As a parent, once your teenager indicates interest in investing, it is your responsibility to make sure they have all they need so they don’t sabotage the process.
Beware of Scams
Investments demand serious work and commitment. However, because it also holds the promise of high yields, people, especially inexperienced ones, fall prey to scams. Unscrupulous people seize the opportunity provided by the naivety of teens to fleece them of their earnings.
As a teenager looking to invest or a parent looking to get your teenager started with investing, it is imperative to watch out for scams. As a general rule, if an investment promises returns that sound too good to be true, they most likely are not. Some stock options give high returns, no doubt.
However, they should be reasonable and be within certain expected parameters. Thus, you have to be careful; even as a part-owner, you could lose huge sums of money if a scammer gets their hands on your portfolio or virtual trading account.
Scrutinize the Intended Company Carefully
It is also important not just to invest in any company listed on the stock market. Parents of teenagers have to direct their wards towards companies that have gained repute over the years. Of course, no one may be able to fully predict the possibility that any given company will do well in the future or not.
Hence, the parent (or the teen) can utilize certain parameters to predict how well an investment in any company will fare. Companies typically make public their financial data for any given period. The teenager can take advantage of this to learn as much as possible about any company they have an interest in.
Similarly, certain indicators such as the company’s Return on Equity, Earning Per Share, Price-Earnings Ratio all come together to indicate the health status of any given company. You may want to have these available before going with any company. Lastly, check to see if they are listed with the securities and exchange commission or have any tax liability.
Custodial Brokerage Account for Minors
Unless you’re already 18 years old, all brokerage accounts will require that your parents or legal guardians open a custodial brokerage account for you. This just means that they are legally responsible for the account since you are still considered a minor. Generally, depending on where you live, the account ownership switches over to the teenager at the age of 18 or 21.
Once that’s complete, now it’s time to start investing and making investment decisions!
Where To Invest as a Teen
The crux of this article is showing not just why and how a teenager can begin investing but also explaining how to invest as a teenager and the places to do so. The teen needs to have gathered some measure of experience before this point.
It doesn’t have to be a large amount of knowledge; taking a financial course or two should be fine. The aim is to ensure that they do not get confused. After this stage, the next step will be deciding the places to invest in. Some of the best options to consider include the below.
Begin With a Custodial Account
Generally, a person is not legally permitted to begin investing in stocks till they get to 18. Thus, teens cannot directly buy stocks or enter into any other such kind of investment. However, there is a way to get past this challenge. This is through opening and maintaining a custodial brokerage account for the teen.
A custodial bank account is typically opened by the parent or guardian of the underaged person. The parent “gifts” some money to the account. The teen can then choose the stocks they want to invest in, under the parent’s supervision, of course. An advantage of custodial accounts is that they are quite flexible. Once one is opened for the teenager, they can then invest in other areas as they deem fit.
Start Retirement Accounts or Roth IRA
Investing in retirement is always important. That may seem far away for teenagers, but one of the best tools that a teenager can use to start investing is to open a Roth IRA. Just like with adults, Roth IRAs are a huge advantage over traditional types of investment accounts or savings accounts because of the tax benefits it provides.
With a Roth IRA, the money you contribute now is taxed. But then when you retire in the future, all of your withdrawals can be made tax-free. This includes any investment earnings you’ve accumulated over the decades.
That’s a very important point. Look back to the example we gave at the beginning of the post. The initial $10,000 was the contribution, and the rest of the $1,173,909 that grew on top was the earnings. Therefore, inside of a Roth IRA, all of that money would be available to you tax-free!
Compared to how a traditional IRA or 401(k) plan works (i.e. pay no taxes now and instead pay them later in the future), it makes a lot of sense for a teenager to start using a Roth as soon as possible. Why? Because a teenagers’ marginal tax rate will never be as low as it is while they are working a part-time job. When they grow up and earn more money, they will naturally move up into a higher tax bracket.
Invest in Index Funds
If you’re a parent who isn’t sure what kind of funds their child should invest in, then look no further than something called an “index fund.” An index fund is simply a financial asset (usually a mutual fund or ETF) that contains all of the same holdings as a major market benchmark, such as the S&P 500 stock index.
The advantage of an index fund is that with almost no effort, an investor can easily capture the average return of the market. Currently, the long-term average return of the S&P 500 index is 10 percent. That’s not a bad return at all!
If you understand how the stock market works, then you might also want to consider introducing your child to stock investing. You can definitely make money in stocks!
You don’t have to look too far to find some good ones. For example, you could have your teenager research the companies that are a part of the Dividend Aristocrats, a list of well-known companies that have paid consistent dividend returns over the years.
You could open a custodial account through any of the following:
- Full-service brokers such as Vanguard and Fidelity
- Discount brokers such as E-Trade or TD Ameritrade
- A robo-advisor such as a service like Betterment, Wealthfront, and M1 Finance.
Teenagers can also consider investing in mutual funds. A mutual fund houses stocks from several companies. This is an excellent way to work the system because you end up with diversified investments.
As a minor, mutual funds afford you the opportunity to invest in several companies using any amount and gaining profit while at it. Of course, the risk of losses is not eliminated. However, any such loss will not severely impact teens who explore this option.
Try a Micro-Savings App
One of the easiest ways to get your teenager in the habit of investing is to let an app do all the work for them.
A good way to do this would be through a micro-savings app like Acorns. With Acorns, every time your teenager makes a purchase with their debit or credit card, it gets rounded up to the nearest dollar. The extra change then goes into an investment account that can be used to periodically buy ETFs (exchange-traded funds).
Believe it or not, all of that extra change can really start to build up over time; especially when you consider that it’s also being invested for growth! In fact, if your teenager is a student, Acorns won’t charge them any fees.
Open A CD Or High Yield Savings Accounts
If you’d prefer to keep things very simple, then perhaps you could ask your teenager to research reputable places to open a CD (certificate of deposit) or a high yield savings account. Sites like Bankrate make it extremely easy to find the best ones.
Though most banks aren’t necessarily paying very high rates of interest, you can rest assured that your investment is safe and that at a minimum you are encouraging your child how to save money.
Real Estate Investing
Away from individual stocks, bonds, etc., you may also want to start investing in real estate. While investment options like an index fund have age barriers, you cannot say the same for real estate.
Thus, this is an opportunity teen investors can take up at any time. Additionally, while people have to be familiar with the stock market to begin investing in stocks and bonds, investing in real estate can be as simple as identifying a company and putting up the required funds.
Bear in mind that you don’t have to watch over it like you would a brokerage account. This way, you can focus on other areas of your life.
Start a Small Business
Finally, one last great way to get your teenager involved with investing could be to have them start their own small business. This might be any number of simple ventures such as doing landscaping, selling baked goods, running a stand at the farmers’ market, pet sitting, etc.
This would give your child a first-hand experience with how business works while they put up their own money to get the business going. Plus, who knows … it might just encourage them to become the next great entrepreneur!
Conclusion: Investing as a Teenager
It is amazing getting your teenager started on learning about investments as early as possible.
If you are a teen venturing out on your own, that is also awesome. However, in both cases, it is important to realize that the risks associated with investments will certainly affect the teen too.
In fact, age and a lack of experience could be factors that determine how well the new investor will fare. Thus, it is important to learn the basics about the investment options to consider, the company you intend to invest in, and so on. The product of such in-depth scrutiny will be dexterity in investment. And f you ever find yourself at an investment crossroad, seek independent financial advice.