Are you a teen wondering how to invest? Or the parent of a teen wondering whether or not you should let your teen invest?
There are many reasons why teenagers should consider investing their money. However, there are also some important things you need to know before you start investing as a teen, from understanding investment risk to the types of investment accounts that are available.
This article will share some investing essentials teens and their parents need to know before getting started.
Table of Contents
Why You Should Invest as a Teenager
Let’s start with why you may want to consider investing as a teen. The truth is that the teen years are the ideal time to begin investing. Here are some reasons why that’s true:
1. You’ve Got Less Financial Responsibilities
As a teenager, you’ve likely got fewer financial responsibilities than you will a few years down the road. You probably don’t have a spouse and children to support.
If you’re still living at home, you probably aren’t paying rent. Even if you are paying rent, it’s likely a smaller amount than you’d pay if you were living on your own.
Since your financial responsibilities are probably quite limited, you’ve probably got a higher percentage of your money that doesn’t have a place it needs to be.
That will likely change as you get older. You may gain a mortgage payment, college costs, and other expenses.
Use this time to put any money that doesn’t have a designated purpose into an investment account.
2. You’re Sheltered from Making Investing Mistakes
Another reason why you might want to consider starting to invest as a teenager is that being under your parents’ roof is the time to make financial mistakes.
Everyone makes money mistakes that they wish they wouldn’t have made. Managing money and investing, like everything else, involves a learning curve.
Navigating that learning curve as a teen under your parents’ roof will have much less of a negative impact than making mistakes when you’re grown and raising a family.
Losing money on poor investment choices, experimenting with different types of investments, and recovering from potential losses are all better done when you’re a teen with limited responsibilities.
Conversely, taking investing risks and making investing mistakes when you’re grown and have weightier responsibilities could have a much larger negative impact on your life.
3. Time Is on Your Side
Another powerful reason you should try to invest as a teenager is that time is on your side at your young age.
This means that the younger you are when you start investing, the longer compound interest can work in your favor.
Here’s an example of the power of time in investing, from Wallet Hacks founder and owner Jim Wang.
Look at these two investing scenarios and compare the difference between money invested early and money invested later.
“Let’s illustrate this with two extreme cases… Early Ellie and Late Larry.
Both start working at 20 and both want to “retire” at 60. The market returns 7% a year, compounded monthly.
- Early Ellie diligently invests $100 a month for ten years. She stops contributing when she turns 30 but leaves the money in the market for the next thirty years until she’s 60.
- Late Larry waits ten years before he starts investing $100 a month into the stock market for the next thirty years until he is also 60.
(the average stock market return, Dow Jones Industrial average specifically, from 1965 – 2018 was 6.28%)
Early Ellie invests early, Late Larry waits and is late.
Who ends up with more money? Ellie, who has personally contributed $12,000, or Larry, who has personally contributed $36,000?
- Ellie – $141,303.76
- Larry – $122,708.75
Ellie has contributed $24,000 LESS than Larry, but she wins because time is the friend of compound interest… she wins. By a LOT.”
As you can see, both Ellie and Larry invested just a small amount of money each month: $100 per month.
However, because Ellie started early, she could contribute much less (and for a much shorter period) to her retirement account but still ended up with more money than Larry.
See the entirety of the article where this example came from by reading The Power Of Investing Early for more surprising and fun facts about how investing early can benefit you.
So, you’ve decided that it’s in your best interest to invest during your teen years: What should you invest in?
How you Should Invest as a Teenager
Before you start investing, whether you’re a teen or an adult, it’s a good idea to establish your investor profile, which includes assessing your risk tolerance level.
You can accomplish the latter by taking a risk tolerance quiz. The quiz will show you whether you prefer low-risk, moderate-risk, or high-risk investing. Remember, your risk tolerance may vary for different investments.
The results will help you determine the most suitable investment. Here are some examples of low, moderate, and high-risk investment vehicles.
Low Risk Investment Choices
Low-risk investments come with little-to-no chance of you losing your initial investment.
And while the trade-off comes in the form of minimal returns, you have the peace of mind in knowing that you likely won’t lose the principal you’ve invested.
Some examples of low-risk investments include:
- High-yield savings accounts
- Savings bonds
- Money market accounts
- Certificates of Deposit
- Municipal bonds
These types of investments have little to no risk of loss of initial contribution to the investment. However, the interest rates paid are very low.
Moderate Risk Investment Choices
Moderate risk investments are designed to produce regular income with some potential for capital appreciation. Over the long term, returns should be favorable to the best high yield savings accounts, which currently only pay around 0.40% to 0.50%.
Some examples of moderate risk investment choices can include:
- Government and corporate bonds
- Preferred shares
- Real Estate Income Trusts (REITs)
- Crowdfunded real estate (in some cases)
- Crowdfunded lending (in some cases)
While the risks in these types of investments can yield you a moderate return, you also have a chance of loss, both of your initial investment and any returns you might earn.
High Risk Investment Choices
High-risk investments come with a chance for a much higher rate of return than low and moderate-risk investments can offer.
However, your potential risk for “losing it all” is also much higher. Some examples of high-risk investments can include:
- Individual stocks
- Equity ETFs and mutual funds
- Cryptocurrencies
- Hedge funds
- Crowdfunded real estate,lending, or business startup investing
- Penny stocks
Understanding Investment Diversification
The allure of advertised historical investment returns can be enticing, but it’s important to invest carefully by building a diversified investment portfolio with a mix of low, medium, and high-risk securities.
You’ve probably heard the saying, “don’t place all of your eggs in the same basket.” This is especially true with investing. By spreading your investments across several asset classes, or investment categories, the balance of your portfolio will provide stability when other holdings drop in value.
Personally, I tend to have a low-risk tolerance, but everyone’s different. You may have a higher risk tolerance and choose to invest more of your money in higher-risk investments. Your investment time horizon also plays an important role. In theory, as your time horizon increases so should your ability to tolerate portfolio volatility.
For most investors, it’s wise to have a mix of low, moderate, and high-risk investments in your portfolio. This is called “diversification.” By diversifying your investments, you help facilitate a balance between earning attractive returns and protecting your portfolio.
Next, let’s talk about some companies you might consider using if you’re ready to invest as a teenager.
Best Companies for Investing as a Teenager
While these investment companies aren’t geared specifically for teens, they are good overall investment companies with attractive options and low fees.
Acorns
Acorns is an investment platform your parents can open for just $5 a month for the entire family.
If you’re 18 years old or older, you can open your Acorns account for just $3 per month.
Acorns accounts include banking accounts and automated investment accounts to invest in a diversified portfolio created by Acorns experts.
Next, let’s answer some popular questions you might have about how to invest as a teenager.
Start investing with Acorns today.
Ally Invest
Ally Invest offers self-directed (you manage the account and decide on the investments, along with your parents) and managed (help from an investment advisor) custodial investment accounts.
This account has no minimum balance requirements and no monthly fees. There are some fees for investment share purchases; however, there are also some fee-free investment options that you can purchase.
Start investing with Ally Invest today.
Fidelity
The Fidelity Youth account is a custodial account that allows you to spend, save, and invest your money.
You don’t require a minimum balance with this account, and there are no account or domestic ATM fees.
Fidelity gives you several investment options, including mutual funds and stock shares.
Stockpile
Stockpile offers custodial and non-custodial investment accounts with no minimum balance, no monthly fees, and trading fees.
You can buy whole or fractional shares of company stocks with your Stockpile investment account, starting with purchases as small as $1.
FAQs About Investing As A Teenager
If you’re going to invest independently, you’ve got to wait until you’re 18 and a legal adult.
However, you can invest at any age if your parents open a custodial investment account on your behalf.
Custodial investment accounts fall under the banner of UTMA (Uniform Transfers To Minors Act) or UGMA (Uniform Gifts To Minors Act). UTMA and UGMA custodial accounts have some differences, but both must be opened by an adult trustee such as a parent.
With both types of accounts, the money belongs to the minor child. However, the child can’t access the account until legal age. If you are under age 18, talk to your parent or guardian about opening a custodial account in your name.
Under IRS rules, you will have to pay taxes on investment income if you’ve earned more than $1,100 in 2021. How you file, including the forms used, will depend on your entire tax situation. See this IRS article on tax rules for children for more information.
When you choose to start investing, you’ve got several options. You can open an investment account to start saving for retirement (such as an IRA). Or you can open an investment account designated for college funds (such as a 529).
Lastly, you can open an investment account that isn’t tied to retirement or college funds. The type of investment account you should open depends on various factors. Talk with your parents to help you decide which type of investment account is best for you.
Investing As a Teen: Final Thoughts
Learning how to invest as a teenager can be a daunting task. However, with a bit of trial and error, you can find an investing path that’s right for you. Whether the purpose is to save for your education, your first house, or your first car, use the time living under your parents’ roof to discover your investing style and navigate your investment successes and failures.
Comments
Post a Comment
We will appreciate it, if you leave a comment.