How To Prepare Your Teen for Their First Financial Investment

Everything You Need To Know Before Your Teen Starts Investing

A parent and teen talking
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As a parent or guardian, the day will come when it’s time to start talking to your child about finances. A part of that conversation may be teaching them about investing: putting money into an asset with the expectation of a financial return.

There’s a lot that goes into investing and as a parent or guardian, it may feel overwhelming to be the one to teach your child, especially if you don’t feel you’re an expert. But teaching your child to invest from a young age can give them a huge head start, both in reaching their financial goals and in the financial literacy that will benefit them the rest of their lives.

In this article, you’ll learn the financial foundations that should be in place before your teen starts investing, the best investments for teens, and how to prepare your teen for their first financial investment.

Key Takeaways

  • Teaching your child about investing can give them a headstart in reaching their financial goals and gaining financial literacy.
  • Before approaching the topic of investing, address other financial foundations, such as opening a checking account, budgeting, and basic money management.
  • Starting with the basics of compound interest, diversification, and risk can give your child a deeper understanding of investing.
  • Investments you might consider adding to your teen’s portfolio include stock in their favorite companies, bonds, and pooled investments such as mutual funds and ETFs.

Make Sure Your Teen Has a Checking Account

Before you start preparing your teen to invest, it’s important to have some other financial foundations in place, and that’s likely to include opening a checking account, according to Taylor Jessee, a CPA, CFP, and the director of financial planning for Taylor Hoffman Inc.

“You probably want [the conversation] to accompany some sort of introduction to finances,” Jessee told The Balance in a phone call. “That probably starts with opening a checking account for them and teaching them to budget, and maybe a part-time job. Once you feel they’re at a point where they’ve had some experience handling money, that’s when you can feel comfortable having that investing conversation.”

Plenty of banks and credit unions now offer student checking accounts for both teens and college students. Not only do these accounts provide a learning experience for your teen, but they usually don’t come with the fees and account minimums you’d expect to find with a traditional checking account.

Look at Apps and Other Resources for Investing

While many schools still don’t teach financial literacy, teens today are coming of age in a unique time. Thanks to technology, they have access to financial apps and resources to help them.

There are plenty of online resources that specialize in teaching people about personal finance and investing basics. Some of those resources are specifically designed for teens, making the lessons more approachable and easier to understand.

In addition to the educational resources you and your teen can turn to, there are plenty of digital tools that can help your teen manage their money. Budgeting tools and other resources can take some of the monotony out of personal financial management.

Help Your Teen Understand How Investing Works

Once you have the financial foundations in place, you can introduce the topic of investing to your teen. Remember that investing concepts can be confusing even to those with more experience, so it’s important to start from square one and take it slowly.

“Just having the conversation and talking about money is a huge first step,” Jessee said. “If you avoid the conversation and hope they learn through their own experience, it can be harder for them down the road.”

Here’s how to start talking to your teen about investing:

Go Over the Basics

Before you get to the point of actually helping your teen buy assets, it’s important to start with the basics.

First, talk to your teen about why investing is so critical. For example, you can talk to them about compound interest and how assets can grow exponentially over time. You can use our compound interest calculator to demonstrate to your teen just how much their investments can grow when given the time to do so.

It’s also important to discuss the basic principles of building an investment portfolio, which include determining their time horizon and risk tolerance, weighing risk and rewards, and building a diversified investment portfolio.

Show Your Investments to Your Kids

Another way to approach investing with your teen could be to show them your own investment portfolio. This conversation could include you explaining what each investment is and why you chose it for your own portfolio.

Showing your teenager your investments may look different for each family. Some parents may be happy to share their entire portfolio with their teens, while others may be uncomfortable showing their kids actual dollar amounts. It’s important to decide what your comfort level as a parent or guardian is.

If nothing else, you can use this strategy as a teaching tool to explain to your teen how money gets into your investment accounts.

“You can say to your teen, ‘Here's how we handle our finances. We have this account we pay bills from, and a slice of it goes into a 401k or an IRA,’ ” Jessee said.

Explore Their Interests

As with many things, one effective way of keeping your teen engaged with the conversation of investing may be approaching it using things they’re already excited about. For example, if you broach the subject of stocks—what they are and how to buy them—you could do so using stock for your teen’s favorite companies.

“I would say if you’re going to use it as a learning experience, it’s more memorable and relatable if you’re looking at companies your kids would be familiar with, like Disney, their favorite clothing company, or the technology they use, like Apple,” Jessee said.

However, while it can be a helpful learning tool to help your teen buy stocks they’re interested in, it’s also important to send the right message and set your teen up for healthy investing habits for the future.

“I wouldn’t haphazardly go out and buy stocks, like those meme stocks that were popular,” Jessee said. “You wouldn’t want to confuse investing with gambling. If you’re just picking stocks for the excitement of it, you may inadvertently teach [your teen] that investing is more like gambling, which would be detrimental in the long run.”

Investment Options for Teens

When it comes to what your teen should actually be investing in, it’s important to consider their financial goals. The investments you choose to help your child save up for their first car next year will be very different from the investments you may choose for their long-term savings.

Some assets you might consider helping your teen add to their portfolio include:

  • Stocks: Equity in a company that can grow in value over time
  • Bonds: Loans an investor makes to a company or government entity (bond issuer), where the bond issuer promises to pay them back with interest
  • Pooled investments: Assets like mutual funds or exchange-traded funds (ETFs) that allow investors to add many securities to their portfolios at once

Frequently Asked Questions (FAQs)

What is the best investment for a teenager?

There’s not necessarily one best investment for teens; it’s important to consider your teen’s short- and long-term financial goals, their time horizon, and their risk tolerance. Find a balance between investments that interest your teenager with those that will help them reach their financial goals and teach good habits. You can do this by teaching your teen about diversification.

Can (and should) a teen start investing in real estate?

Real estate is one of the most—if not the most—popular investment options available. If your teen is interested in real estate investing, you might consider adding real estate investment trusts (REITs) to their portfolio instead. REITs can be a way for you to teach your teen about real estate and for your teen to earn money from real estate investing without directly purchasing real estate.

Most states require that someone be at least 18 years of age to enter into a legal contract, which would be required to own real estate. Additionally, real estate investing can be incredibly costly and require a lot of responsibility.