Investing Guide for Teens (And Parents)
How to Invest as a Teenager
At a certain point, most teenagers reach a point when they stop relying on allowance and start earning money of their own. These first few paychecks offer a great opportunity to start teaching your teens about investing.
Investing can be complex, but it doesn’t have to be. No one expects a teen to become a billionaire hedge fund manager before they turn 20, but when someone starts investing as a teen, they can learn money lessons that only become more useful as they grow up.
Let’s take a look at some things teens and their parents can do to get started with investments.
Study an Investment Returns Calculator
One of the most powerful things you can do when introducing teenagers to investing is getting them to understand the benefit of time in the market.
One way to help teens understand the powerful effects of time is to use an online calculator that can simulate different investing scenarios. These calculators let you customize variables such as the amount you plan to invest each month, the number of years you plan to invest, and the expected rate of return. CalcXML.com offers a variety of financial calculators that can help teens understand various financial scenarios, but that's just one example of a resource.
This exercise is especially important for teens because it’s clear that the best way to accumulate large sums is to start early, due to the power of compound returns.
Buy a Stock (Any Stock at All)
While it’s true that most people—especially teens—should avoid the practice of “picking stocks,” it can be a great education for someone starting. Picking individual stocks and watching them over several months can help teens learn a lot about how the markets work. This lesson can be worth more than relative gains that would've been earned by using an automated investing service.
Consider letting a teen buy some shares of stock in a company of their choosing. Have them check in on the stock's performance now and then, and help them understand why the shares gained or lost value.
Many brokerages allow investors to buy partial shares in companies, so teens won't have to risk that much money on their choices. They can put in $10 here and $10 there and see what happens to their money.
Most brokerages require customers to be at least 18 years old. When the teen learning how to invest is under 18, the parent will likely have to be the one buying and selling the stocks. They could do this in their own brokerage account in coordination with the teenager's decision, or they could set up a custodial account.
A young person must first understand that stock investing, at its core, is owning part of a company. If the company does well, the investor does well, and vice versa. This is a powerful thing to learn. It can be exciting to say that they are a part-owner of Disney, McDonald’s, or Coca-Cola, and it's even more exciting if that partial ownership actually earns them money.
Invest in a Low-Cost Fund
Once teens watch their stock choices for a while and develop a basic understanding of markets, they should move onto mutual funds or exchange-traded funds (ETFs). These funds allow an investor to invest in a broad set of stocks and spread out their investment risk.
The best options are funds that offer broad exposure to the stock market with very low expenses. Index funds designed to mirror the performance of major indices like the S&P 500, Nasdaq, and Dow are popular options.
As a teen watches their fund investments and compares the performance to their individual stock picks, they'll learn about the benefits of diversification. They'll also learn how to assess the fees and holdings of a fund.
Automated investing services can be useful for teaching teenagers about how to balance a portfolio, as well.
Open a Roth IRA
While it may be hard for teens to imagine retiring, parents should try to teach their children the importance of saving for retirement. One great way to do this is by opening a Roth IRA for the teenager. Investments held in these accounts grow tax-free, as long as you wait until age 59 ½ to withdraw it.
To teach your child the importance of investing for retirement, run through hypothetical scenarios. Show them how maxing out their Roth IRA contributions starting at age 18 differs from a scenario in which they don't start maxing out their Roth IRA contributions until age 30.
Open a High-Yield Savings Account
Teens should also learn that it isn't wise to put 100% of your money in stocks. It's a good idea to keep some of your money in cash, but that cash can still earn some yield. This is an opportunity for them to learn how interest rates work.
Since teens tend to be tech-savvy already, they will likely have no problem finding an online savings account that offers relatively high interest rates and an intuitive app.
These online savings accounts are designed to encourage saving. They often don’t allow you to withdraw money using an ATM card, and many won’t even let you write checks. Teens can deposit a portion of their earnings into this account and get started on the path to savings.
Start a Small Business
You don’t want your teen blowing their entire savings on a speculative venture, but it could be beneficial to teach your teen the basics of what it means to invest in their own business. They might have an idea for an Etsy shop, or they could try advertising a lawnmowing business around the neighborhood. This can help them learn business essentials like purchasing equipment or inventory, tracking expenses, deciding on prices, and logging revenue. There are many examples of teens who have gotten rich through entrepreneurship, but even if your teen isn’t going to be on "Shark Tank" tomorrow, they can still learn a bit about how to make money through self-employment.