Investing for Teens: Everything You Need To Know

Most teenagers are not very likely to learn about investing. But it is a very important thing to archive financial freedom when you are a complete adult.

#1. Why You Invest As A Teen

First reason

it's not really taught in public schools. And a lot of the investment advice and resources that are out there are geared more toward adults that are already concerned about things like mortgages or raising children or saving for retirement. 

But investing at a young age can come up with a ton of advantages, and will put you ahead later in life, even if those aren't your top priorities right now. So here's a look at some of the ways you can get started investing if you are a team, or how you can help your team get started investing if you're a parent. 

So you may be wondering why it's a good idea to start investing in the first place. If you're a teen, most teenagers are more concerned about having enough cash to go to Chipotle or go out with their friends on the weekends. And they aren't really thinking about retirement, the first reason you may want to consider investing is to get a jumpstart on college or trade school. 

How do I properly begin investing as a teenager?

So if you are planning on going to a traditional college in the US, the average tuition is upwards of $37,000 a year. For most people, it is going to take that full four years or even five years to finish college for just finishing your college education. If you don't have anything saved up, and you have to take all of that out in loans, you're looking at a six-figure loan just for a basic college education. 

If you start investing in your teen years and saving up for those college goals, or even if it's not college, and it's something like a trade school, having that savings and allowing it to grow over time with compound interest is really going to work in your favor, then even if it doesn't cover the entire cost of your tuition. 

Reducing that big loan amount that you have to take out is really going to be helpful, then when you graduate and you're starting your adult life, you'll be able to put that money towards other things and maybe even more fun things than paying off your loans.

Second Reason

The second reason is to take advantage of compound interest. So the way that compound interest works, it builds your money over time, and the interest that you earn on the money you have earns you even more money which earns you even more money, the longer amount of time that you have in the stock market, the more potential your money has to give you bigger returns. 

For example, let's say that you open an investment account at the age of 15. You and maybe your parents contribute a total of $5,000 per year and place that money into a low-cost index fund by the time that you're 21. Maybe you start contributing the full $5,000 yourself. 

And if you continue to contribute to the account each and every year, by the time you're 65, you could have a total of $2 million. Now maybe you can't contribute a full $5,000. And maybe you're starting later than 15. But either way, that is an extraordinary amount of money for only having to contribute $5,000 a year. 

Third Reason

The third reason is simply for the experience of learning about investing. Like we said earlier, there are not many resources, at least in public schools that are going to teach you about the benefits of investing. So when you start doing it yourself, that tends to spark an interest in how it actually works, and where your money is actually going.

There are so many free resources now on YouTube and Google and pretty much anywhere else that you can learn all of this without having to have like a master's in economics. So hopefully over the course of investing your money, you'll gain an interest in that gain some curiosity go and look for the things that you're interested in, and gain an overall better understanding of how you can let your money work for you. 

Fourth Reason

The fourth reason is to get a head start on your wealth building, a lot of people won't start investing until they're 30 or 40, which is okay. But the later that you start investing, the more you'll have to contribute to get your account to a million dollars or $2 million $6 million, or whatever your goal is.

Like I showed with that example earlier, contributing a small amount every year if you start in your teen years is going to add up to a lot of money over time. Plus, the earlier that you start the more mistakes that you can make because you have that much more time to make up for them. So it's a great learning opportunity.

#2. Ways To Invest As A Teenager

Stock Market Investing

So now that we know the value of investing at a young age, let's take a look at some of the ways that you can actually invest. The first way would be stock market investing. Nothing has built wealth as the stock market has and a very simple way to get started with this is to find a low-cost index fund and Vanguard and fidelity offer a lot of good ones.

And when you go with one of these low-cost index funds, it's like you're buying into a big pool of a lot of different stocks, these low-cost index funds mean that the majority of your money is going towards that investment and not towards broker fees or weird management fees or things like that. 

How To Invest Under 18

But what do you do for an account, if you're under 18, you are going to need a custodial account, this is basically going to be an account that a parent or guardian opens up for you. And they are technically the ones managing it. Now how much they actually are involved with?

It is going to be totally up to you to talk with them, maybe they will let you just manage the whole thing by yourself. Or maybe they do want to be a little bit more involved. But basically, it's an account that they have to sign up for and say yes, this is my child I am responsible for and I am responsible for this account. And they have to do that on your behalf until you are over 18. 

The 529 Plan

The second option is a 529 plan. This would be good if you're a parent that is trying to save for your child's college or if you are already a teen and you've heard your parents talking about needing to save for your college, have them look into a 529 plan. 

This comes with some tax advantages that are similar to a Roth IRA. So you're putting after-tax money into the account, meaning money that you've already paid taxes on. Once you're ready to actually use that money and take it out of the account. 

You won't have to pay taxes again, on any of those gains, there are different limits depending on which state you live in for how much you can actually save in a 529 plan. So you'll definitely want to check that for your state before you open up an account. 

 

The IRA

Another option is an IRA. So there are a couple of different types of these, there's a traditional IRA and a Roth IRA, I'm not going to go too deep into this, But a Roth IRA could be a great option. If you are a teen that is just starting out with investing. So again, the money that goes into this account is going to be money that you've already paid taxes on.

When you take that money out in the future at retirement age, you won't have to pay taxes on the gains with Roth IRAs, you can contribute up to $6,000 a year and that changes sometimes from year to year, sometimes they'll bump it up. And if you're older that amount can go up if you are way closer to retirement. 

Start A Business

Another option for investing your money when you're 18 is to use it to actually start a business. A lot of the people that we view as rich or wealthy started their own businesses at some point. And this can teach you a lot of things about money and having your money work for you. And just give you a good life and social skills. 

So this doesn't have to be a business that you want to do for like the rest of your life, I would recommend picking something that you're already good at that you already enjoy doing. And figure out how you can make a business out of that. If you aren't sure what you should start here are a few ideas. 

You could do more physical businesses like landscaping or housework you could teach other people and do music lessons or tutoring, could walk people's dogs, and open up an online store with something like Shopify or Etsy. Or you could start doing marketing and social media for local businesses. And while I do think that there are a ton of opportunities to earn money online.

It can be a little bit difficult if you are relying on one platform to do that through. So for example, if you wanted to do freelancing, a lot of the freelancing platforms are going to restrict the age to people who are over 18. So you may have to get a little bit creative with how you're finding clients. 

If you're doing something like graphic design or social media business or if you're starting an online shop through something like Shopify or Etsy you may need to get your parents to enter their information and do it from there. So there is kind of ways around it, you may just have to be a little bit creative with it. 

High-Yield Savings Account

And if neither of those are appealing to you, you could always just put your money into a high-yield savings account. So high-yield savings account although this isn't technically investing is still going to teach you good money skills. As far as saving goes. This may be a good idea If you know that you're going to need the money that you're saving in like a year or two or even just a few years.

If you know that you're going to have to take that money out to pay for college, maybe consider putting it in a high-yield savings account. So high yield just means that the interest that they're paying you is going to be a little bit higher than the national average. Some of the big brick-and-mortar banks only pay point zero 1% in interest for you keeping your money there. 

But these high-yield savings accounts will pay a little bit more than that. So these rates will fluctuate with the interest rates in general. But what you want to look for neobanks, these are banks that don't have physical locations. So some credit card companies have opened up their own like I know that discover has their own Capital One now has some online-only options as well. 

And there are other banks like ally or novo, but because they don't have those physical locations, they are able to put that money elsewhere and pay you a little bit more interest. 

How do I properly begin investing as a teenager?

So now that you're ready to start saving or investing, it's time to actually fund those accountants. So where are you going to get this money from, you are probably going to need to have a job or start a business of some sort.

But an easy way to start saving money is to set up automated savings. So with most bank accounts, and with most investment accounts, you can automate taking out money from your checking account and putting it into either that savings or that investment account. 

And you can do that on a schedule. So for example, if every first of the month you want to take out $100 and move it over into your savings, you can set it up to do that automatically.

Just make sure that whatever amount you choose that you do always have that amount of money ready on the day that it's going to be transferred, it's also a good idea to start setting savings goals and to make these really specific. 

So it's a good idea to take whatever your end goal is that exact amount and divide it by the amount of time that you have left. And then you'll know that you have to save that much either every week or every month.

#3. How to Save Money as a Teen

Now the thing that you want to do is to avoid any unnecessary or impulsive spending. So I do have a few tips for this. 

The first tip is, that you can wait a certain amount of time before you actually make a purchase. And you'll kind of have to determine this for yourself. But I would say start with 24 hours and maybe bump it up to 48 or 72 hours if it doesn't work that well. 

So when you want something, you'll wait that amount of time until you allow yourself to actually purchase it. That'll give you some time to think about whether or not you actually need it. And whether or not you actually want it that bad.

The second tip is to actually go into your Amazon account or your target account or wherever you can tend to impulse shop and remove your credit card information from their system.

If you have to go in and enter your credit card or your debit card information every single time you make a purchase. It'll give you that little buffer of time to reconsider whether or not this is an impulse purchase or whether or not you actually need that item. 

The third tip is to always shop with a list and actually stick to it. We've all been in this situation where we walk into Target to buy a notebook and then we walk out with the whole store somehow. So that is what you want to avoid. Always go in with a list and just buy those items. 

So even if you are a teen Hopefully these tips will be helpful for getting a head start on building your wealth and remember the earlier that you start the better off you're going to be.