Do you ever sit back and think of how much money you could have if you started to invest as a teen? Have you ever asked your parents if they started investing at a young age?
We can’t turn back time for your parents, but what we can do is help you make the right decisions for your financial future.
If you are a teenager, and are motivated enough, you can start investing at a very young age and set yourself up to have a comfortable retirement. The term investing is used pretty loosely and it can be as simple as throwing up a quick savings account with higher interest or a Certificate of Deposit (CD) at a bank. There are a few things a teenager, under the age of 18, can do to start investing and we cover the basics and give some tips on how you can start investing as a teenager or minor
If you’re not even sure what investing is, we’ll tell ya:
What is Investing?
Investing is when you allocate your funds to an asset or capital endeavor with the expectation that you’ll generate profit or income.
It’s good to note that investing isn’t really like adding to your savings account and calling it good. When you’re investing you are basically giving your money to someone else and expecting them to provide you with even more money in the future. This isn’t always the case but a lot of investors see growth year over year depending on how aggressive they are.
You can start investing even with a little amount and we suggest you find ways to invest as soon as you can. There are tons of ways to invest with small amounts of cash. The amount you can afford to invest right now isn’t the most important. The most important thing is to take advantage of time and invest while you’re young.
Types of Investing
You’d be surprised at how many types of investing options are out there. We won’t cover them all, but we will cover the ones that are the easiest to break into at a young age.
Common Types of Investments:
- High Yield Savings Accounts
- Certificates of Deposit (CDs)
- Mutual Funds
- Roth IRAs
- Bonds, Municipal Bonds
These are only a few of what you’ll probably run into if you move into investing as a revenue stream.
High-Yield Savings Accounts
If you’re being money conscious you probably already have a savings account or your parents have set one up for you. If you do, you should consider turning that into a high-yield savings account or even converting it into a CD.
A high-yield savings account is almost the same thing as a savings account but you have a higher interest meaning you gain more per year than you would in a standard account. The APY is different depending on the amount you invest, but usually ranges between 1-2% based on the market. However, we have seen some reach 2.5%. A normal savings account is much lower and typically lives under 1%. The one caveat with a high-yield savings is that you typically need a decent starting fund to open an account for the better interest rates, we suggest at least $500 to $1,000 before opening up an account. You’ll have to review the account requirements through your bank or credit union to see if there’s a required opening balance.
Let’s say you have $10,000 to put into a savings account. An example of how a high-yield savings account can be a good choice:
|Account Type||Standard Interest Rate||5 Year Value||10 Year Value|
You’re probably thinking that isn’t that great of a return and we agree. This is one of the most basic “investments” you can make and is really good if you’re not comfortable moving into the markets or you just have money lying around in a standard savings account.
Certificate of Deposit (CDs)
If you don’t want to leap for a high-yield savings account then a certificate of deposit (CD) is a great second choice. A CD tends to have a bit higher interest earnings than a high-yield savings but it does carry a time requirement. You have to leave your money in the CD for the allotted time or you can face penalties and fees.
A CD’s interest rates usually live around 1.75-2.25%. These often require less startup funds than a high-yield savings account so it is a logical next step for many first time investors or parents setting up investments for their children.
Mutual Funds & Roth IRAs
Moving away from high-yield savings accounts and CDs, you start to see some investment opportunities that are more geared towards retirement. By entering into mutual funds or IRAs you are starting to plan for the future. Many of these are meant to be long term investments that you won’t touch until you’re ready to retire. You may face penalties if you pull your money out too soon.
A mutual fund is when you invest into a set of stocks and spread out your investment risk. These are typically monitored by third parties and you’re buying into the fund itself, not the stocks. If you’re just starting out you’ll want to go with a lower risk fund but that usually means you’ll have less return in the long run. The most known funds are called Vanguard which are great funds to break into for a young investor.
A Roth IRA is probably the best option an individual, teenager or not, can get into at a younger age. A Roth IRA allows your money to grow tax-free as long as you wait until you’re almost 60 to withdraw from it. You will have to pay taxes on it when you do withdraw. This can be pretty intimidating to try and think 40 or 50 years in the future but establishing a routine deposit into a Roth IRA can be very fruitful long term. A typical Roth IRA gets around a 7 to 10% rate of return and they do have contribution limits, as of right now you can only contribute up to $6,000 per year.
Taking standard values, here is an example of how much return you’d see with a Roth IRA if you started one at 18 with a $2,500 balance and contributed $100 per month to it:
|Starting Balance||Yearly Contribution||Total Contributions||Est. Final Value|
As you can see from the above you can simply turn $1,200 per year over your lifetime into almost $500,000 when you go to retire at the age of 65. If you were to increase that to $200 per month you would be sitting close to $1,000,000 in your retirement savings along with anything else you have.
You probably have heard about all the people who’ve made millions buying stock in the stock market. This is a tricky area and can be the most volatile for investors and has the most risk out of all the options we will give you. The key to appropriate stock buying is learning how to research and knowing when to play the market.
For example, in early 2020 we had an oil war happen in the Middle East causing all oil and gas related commodities to plummet. This is a great time for an investor with cash to move into this market with the possibility of a large return.
To see this in real values, take a look at the table below where we show someone taking advantage of the market in turmoil and looking to profit when the stock returns closer to the 52-week high:
|52-wk High||Current Price||# Purchased||Total Cost||Total Profit|
Keep in mind that the above is really just a simulation and doesn’t always happen. There is a ton of opportunity in the stock market, but it takes money to make money which is why you may have to start smaller than the example above – and that’s perfectly okay. The chance at losing a large amount of money can also happen at any moment.
Investing in individual stocks carries a greater risk than some of the other investment options you have, so it’s important to do your research. You’ll be able to reap the rewards if you’re patient and strategic.
It’s easy to chip away at earning larger amounts of money over time if you play the market as you can see in the simulation. The key is to take the money you’ve profited from stocks and move it into other accounts, like a Roth IRA.
Have Your Parents Open a Custodial Account
A custodial account is when the parent of the teenager opens the account for them. They are the “custodian” of the account until the teenager reaches the age of maturity. The age of maturity depends on your state and is usually 18, 21, or 25. You really have two options here – you can open a traditional custodial brokerage account or a Roth IRA if you have more money. The broker account is usually the choice most people go with but we would suggest a Roth IRA if you have the funds or can make the yearly max contributions.
The biggest difference in these types of accounts is when it comes time to pay taxes. As stated above, a Roth IRA is tax free and is the best option. It’s important to keep in mind that having a well funded investment account can impact other areas or financial decisions you have to make. For instance, having a large investment account can impact your future ability to get financial aid from the government and FAFSA.
Tips for Young Investors
Tip #1: ALWAYS set a goal for your investing.
Not having a goal for investing is one of the fastest ways to lose your money. Investing isn’t meant to be treated as a “get rich quick” method and almost always is a long term commitment. If you need the money in less than five years, don’t jump into any long term commitments.
Tip #2: ALWAYS Diversify
The key to sustainable investments and securing your financial future is to diversify your investments. You shouldn’t all in on a single investment type or commodity. This is a quick way to lose your money if the market crashes or an unexplained event happens. As your assets grow this becomes more and more of a requirement in your portfolio. You will want a mix of low, medium, and high risk investments to ensure that you’re consistently growing your retirement.
Tip #3: ALWAYS Be Ready to Liquidate
This tip goes a bit against what we’ve been preaching to you so far but it’s still valid. You should always have the ability to make an exit if you need to. It’s a component of the diversification we talked about above. You will want to make sure when you diversify you give yourself enough room to liquidate as soon as you can move into other areas or markets.
There are some scenarios where there is a hold on your money for a good reason, such as a CD or Roth IRA. This makes planning and diversification even more important so you can avoid facing any hefty withdrawal penalty fees.
Tip #4: ALWAYS Understand Risk vs Reward
You should always be aware of the risk that comes with investing. We are sure you’ve heard of the phrase “the higher the risk, the higher the reward”. If you’re just starting out we suggest not spending a bunch of money on high risk investments and instead learn and monitor the markets. The more you watch the markets the easier it will get in finding the better investments. In the start, you’ll want to target some low risk investments to build up even more funds that will give you room to “play”. Once you’ve built up enough funds to have a safe cash reserve, make the jump into higher risk markets.
Tip #5: ALWAYS Stay Educated
This is probably the second most important thing you could do as an investor. You should always be learning and always be on top of what’s happening in the news and markets. Depending on your investing style, it can either be a “set it and forget it” or can be very active. The moment you start investing actively you’ll need to dedicate a moderate amount of time to make sure you have a handle of what’s going on. Just about anything can change the value of a stock in the stock market or the interest on a bond. If there is a bad news release on a major company they can lose billions – just ask Facebook or Google.
Tip #6: ALWAYS Be Prepared for Losses
You should never invest more money than you can stand to lose. Just like gambling – it’s addicting. You track your stock, you watch the news, and you set a budget for how much you want to spend. You pull the trigger. Then you hope in a week, month, year or even longer that you’ll profit. However, if you feel uneasy about the stock or have a gut feeling – follow it. You’re better off taking a profit than a loss any day, even if it’s minimal.