Learning how to invest your money isn’t just something adults should do. Teenagers, especially those who are working and earning an income, could also greatly benefit from knowing how to get the best return on their money.
In fact, the earlier they start using some of the tips mentioned below, the better they will be at handling their finances as they mature through adulthood. Plus, since they’re getting into investing at such a young age, they could significantly see their net worth grow!
Here’s are our tips for how to invest as a teenager.
Why You Should Start Investing As A Teenager
As an investor, if there was one thing I wish I could do with my money, 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 they would be ready to retire. That’s the power that compound interest can have!
You can try this for yourself using this simple calculator from Investor.gov.
Sound good? Before we get started talking about where to invest, we need to talk about custodial accounts.
Custodial Accounts For Minors
Unless you’re already 18 years old, all brokerage accounts will require that your parents or legal guardians open custodial accounts 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 its time to start investing!
Start A 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 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 earnings that you’ve accumulated on your investments 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 An Index Fund
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 with 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’re a little more comfortable with investing, then you might also want to consider introducing your child to the world of stocks. 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 apart 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.
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 its 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-Interest Savings Account
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-interest 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 to develop good financial habits.
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!