Investing, in essence, is putting your money into something in the hopes of making a profit. It is one of the efficient methods of growing wealth and saving for your most important financial goals, such as retirement and your dream home. While most people begin investing as adults, starting as a teen can give you a tremendous advantage in terms of saving for the future and learning important financial principles. Investing may appear difficult, but getting started is simpler than you might think (yes, even for teens). In this article, parents and teenagers will learn about the advantages of investing as a teenager, the best investments for this age range, and how to start investing.
Important Points to Remember
Investing as a teen allows you to increase your wealth through compound interest and develop financial literacy skills at an early age. High-yield savings accounts, CDs, stocks, bonds, and pooled investments are among the finest investments for teenagers. A custodial account is the most common way for a teen to start investing; however, a custodial IRA is also a good option for a working adolescent.Why Should You Encourage Your Teen to Start Investing?
Individuals who begin investing as teenagers rather than later in life have a significant advantage over their contemporaries in terms of potential profits and knowledge gained from the investment. "Age is undoubtedly the most significant asset of a younger investor. It is due to compound interest, or your money's potential to start producing its own money, according to Taylor Jessee, a CPA and CFP and the director of financial planning at Taylor Hoffman. "The earlier you begin investing, the longer your money will be working for you." Let's look at an illustration. Consider a 15-year-old who decides to invest $150 each month in a brokerage account that pays a 10% annual return. Thanks to compound interest, they could save more than $1.3 million if they invested $150 every month until they were 60. Someone who began investing the same amount at the age of 35, on the other hand, would have less than $180,000 at the age of 60. Note: The money in your teen's investing account can be used to help them pay for college, purchase a house, have a family, travel the world, start a business, and many other things. Investing as a teen helps young individuals plan for the future financially and teaches them financial literacy. Personal finances are a cause of stress and concern for many people. According to the Financial Industry Regulatory Authority's (FINRA) 2018 National Financial Capability Study, 53 percent of Americans perceive their finances to be a source of concern, with respondents aged 18 to 34 expressing the highest stress levels. You may help your teen feel more secure and less nervous about money concerns later on by helping them in developing their financial literacy from a young age.What Kinds of Things Should Teens Spend Their Money On?
It's difficult to know where to begin investing when so many options are available, all of which carry varying degrees of risk. Some of the most frequent investments available to teenagers are included here, along with some of the disadvantages to being aware of.Savings Accounts with a High Yield
A high-yield savings account (HYSA) is the simplest approach for a teen to begin earning money. Savings accounts have always existed, but more financial institutions are now offering high-yield savings accounts, which pay a higher interest rate than a standard account. Your money will increase faster with a higher interest rate than in a traditional savings account. Unfortunately, even high-yielding savings accounts have modest rates of return when compared to other investments. Tip: Investing in an HYSA is completely risk-free. The Federal Deposit Insurance Corporation insures the funds up to $250,000. (FDIC).Deposit Certificates
A certificate of deposit (CD) is a savings account-like banking product that allows teens to receive interest on their money. The main distinction is that CDs require you to leave your money in the account for a specific number of months (or even years) in order to collect the stated interest rate. Then, when the CD matures, you'll receive your money back in addition to the income collected on your account. CDs, like savings accounts, are considered a risk-free investment because the money is secured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000. However, the disadvantage is that your money is effectively locked up for some time.Stocks
A stock is a way to buy a share of a publicly listed corporation's ownership (also known as "equity"). You become a shareholder and part-owner of a corporation when you buy a stock. Investors can profit from dividends paid by corporations to their shareholders as well as capital gains when the stock's value rises. "You might take a tiny portion of your portfolio and choose one or two equities to learn how to watch and evaluate individual stocks," Jessee suggested. "Pick one or two companies you're familiar with so you can follow along and relate to them." Warning: Instead of constructing a portfolio consisting of individual companies, Jessee recommends adding equities to your child's portfolio as a supplement to more diverse investments. Stocks are known to be volatile assets, which means they can see significant price changes in a short period of time. You can work together to build a virtual trading account, sometimes known as "paper trading," before adding stocks to your teen's portfolio; you can practise buying and selling stocks without using real money. Virtual trading can offer your kid a sense of how the stock market operates without putting any real money at risk.Bonds
A bond is a type of financial instrument used to secure debt. When you buy a bond, you're effectively lending money to the firm or government that issued it. While bonds may not be as thrilling as stocks to a teen, they are often more reliable assets contributing to a well-diversified portfolio. Due to the interest payments made by the bond issuer over a predetermined period of time, bonds often provide a fixed income.Funds
Mutual funds and exchange-traded funds (ETFs) are popular investments that allow you to obtain exposure to various securities in one transaction. Because they combine the money of many participants, mutual funds and exchange-traded funds (ETFs) are referred to as "pooled investments." Mutual Funds: A mutual fund is a type of investment company that pools money from a large number of investors to produce a well-diversified portfolio. Each investor owns a piece of the fund and is entitled to a portion of the gains and losses. Regardless of when they were placed, all mutual fund orders are fulfilled at the end of the trading day. ETFs (Exchange-Traded Funds): An ETF is a sort of pooled investment that allows investors to diversify their portfolio by purchasing multiple securities with a single investment. One significant difference between ETFs and mutual funds is that ETFs move like stocks throughout the day. You can purchase a single share of an ETF just like a stock and have more power over the price. "I normally advocate starting with an index ETF or mutual fund so you can have rapid access to a diversified portfolio rather than placing all your eggs in one basket with a single stock," Jessee explained. "This is particularly true if you're just starting and have a limited amount of money to invest."Teens Can Open an Investment Account
If your child is younger than the age of 18, opening a custodial account is the most effective approach to begin investing for or with them. This sort of account allows an adult "custodian" to open an account on behalf of a youngster to save and invest money. The youngster will acquire full account management when they reach adulthood—either 18 or 21, depending on the state. "Remember that the child—the account beneficiary, legally owns assets in a custodial account," Jessee explained. "Until the child reaches legal adulthood, the parent or custodian is only a placeholder." It means that putting money in a child's custodial account is deemed an irrevocable gift that cannot be reversed. To put it another way, that money is now your child's." The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are the two most popular forms of custodial accounts. Both are nearly identical; however, the types of assets they can hold differ. Financial assets such as stocks, bonds, mutual funds, and cash can be held in UGMA accounts, whereas physical assets such as real estate can be held in UTMA accounts. A custodial individual retirement account (IRA) is another sort of custodial account that allows teens and their parents to begin saving for retirement before they turn 18. An adult custodian opens an IRA on behalf of a juvenile, similar to a UGMA or UTMA account. The family can then donate up to $6,000, whichever is less, of the child's earned income for the year.Final Thoughts
Despite the fact that most people are aware that they should invest, many may not have considered investing for or with their teenagers. Starting young with investing can help kids develop money, prepare financially for the future, and provide them with the financial literacy they will need later in life.Most Commonly Asked Questions (FAQs)
Is it mandatory to be a certain age to invest in stocks?
It is normally forbidden for investors under the age of 18 to open their brokerage accounts. On the other hand, adults can open a brokerage account for a child of any age, giving them a head start on investing. Remember that the adult custodian, not the child, is in charge of the account and investment decisions, even in a custodial account.Who is responsible for paying taxes on custodial accounts?
Because the child legally owns the assets in a custodial account, they are subject to the same tax laws that apply to unearned income for minors (informally known as the "kiddie tax"). The first $1,100 of a child's unearned income is free from federal taxes under the kiddie tax. The following $1,100 is taxed at the child's tax rate, which is likely to be the lowest tax bracket if the youngster has little to no income. Finally, any earnings over $2,200 are taxed at the same rate as the parents.