While teens should start with the basics of personal finance, like saving and budgeting, learning how to grow their money through investing is also essential. While investing may initially seem complicated, teaching teens about financial literacy can simplify the process. Starting to invest at a young age allows teens to take advantage of time and the power of compounding, giving them a head start toward building long-term financial stability and wealth.
While teens cannot open a brokerage account independently before age 18, they can collaborate with an adult to start investing. This collaboration can set the foundation for a solid financial future, equipping them with knowledge and practical experience to serve them throughout their lives.
Why Teens Should Start Investing Early
Investing at a young age gives teens the benefit of time and the power of compounding, which can significantly grow their investments. Investing early in their lives helps teens build a strong foundation for long-term financial stability and wealth.
The Benefits of Early Investment Include:
- Increased Power of Compounding: Early investing gives teenagers more time in the market, allowing them to reap the benefits of compounding, where returns generate even more returns.
- Higher Returns: Early investment provides more time to recover from market fluctuations, resulting in potentially higher long-term returns.
- Better Financial Habits: Early exposure to investing can create healthy financial habits, such as disciplined saving and strategic financial planning.
- Cushion Against Inflation: Investments that grow over time can protect teens’ money from losing value due to inflation.
- Higher Risk Tolerance: With more time on their side, teens can afford to take calculated risks that often lead to greater rewards in the long run.
Investment Options for Teens
Although teens cannot open a regular brokerage account until they are 18, they can open a custodial account under the supervision of an adult. In a custodial account, an adult manages the investments on behalf of the teen until they reach the age of majority, typically 18 or 21, depending on state laws.
The Uniform Transfer to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA) deal with custodial accounts. These acts enable the transfer of assets to teens while giving adults legal responsibility over the accounts until the minor reaches adulthood.
Teens Have Access to Various Investment Options, Including:
- Stocks: Represents ownership in publicly traded companies; stocks offer growth potential and may provide dividends.
- Mutual Funds: These funds diversify investments across multiple assets, reducing risks while providing exposure to a broader market.
- Bonds: Fixed-interest investments that are typically less risky than stocks but usually offer lower returns.
- Certificates of Deposit (CDs): CDs provide a fixed interest rate over a specific term, offering a safe and predictable return.
- Other Investments: High-risk options such as cryptocurrencies and derivatives like futures and options require more advanced knowledge and carry significant risks.
Tips for Teen Investors
Parents and guardians can help teens develop strong investing habits by providing guidance and support in key areas:
Understanding the Basics of Investing
Introduce teens to fundamental investment concepts, such as stocks, bonds, and mutual funds. Simplify complex ideas like compounding and risk diversification to help them grasp the importance of these principles.
Setting Investment Goals
Help teens define clear investment goals, whether saving for college, a car, or long-term wealth building. These goals will guide their investment decisions and make their efforts more purposeful.
Opening an Investment Account
Teens need a brokerage account to start investing. Since individuals under 18 cannot open accounts independently, they have two primary options:
- Custodial Account: A parent or guardian opens this account, maintaining control until the teen reaches the legal age of majority.
- Invest with Earned Income: Teens with part-time jobs can invest their earnings through options like a 529 plan for education or a custodial Roth Individual Retirement Account (IRA) for retirement savings.
To keep costs low, look for brokers offering features like no account fees, no minimum deposit requirements, and commission-free trading for stocks and ETFs.
Selecting Investments
After opening an account, teens can choose investments in familiar companies or industries they understand. As their knowledge grows, they can diversify their portfolio to reduce risk and maximize returns.
Takeaway
Although teens cannot independently open brokerage accounts, they can start investing with the help of a parent or guardian. Custodial accounts, joint accounts, or other supervised options allow them to gain early exposure to investing, which is essential for financial growth. By learning the basics of investing and developing strong habits, teens can lay the groundwork for long-term financial success and prosperity.