Today we have a guest post from Chris Mueller on investing for teens. Back when I was in high school I always wanted to start investing but never knew how, so this is something I wish I had when I was younger. Enjoy!
Would it surprise you to learn that over a third of teens plan on socking away a cool $100K in savings by the time they turn 30? Or that two out of three teens also see themselves becoming homeowners in their 20s?
Neither goal is as far-fetched as it might initially sound, particularly if a would-be financial whiz learns how to invest as a teenager.
Below, we'll dive into some of the best investments for teens, but first:
What Does the Law Say About Underage Investors?
It truly is never too early to start investing. The sooner you learn how to make sound financial decisions, the better off you’ll be as an adult.
That said, to get started saving and investing money as a teen, you may need a little help. Because minors can’t legally enter into contracts, brokerage accounts are only available to those over 18 in the US or the majority in your Canadian province.
What’s a budding Warren Buffett to do, then?
In both the US and Canada, minor children can access a custodial account, sometimes called a UGMA or UTMA account in America. This setup requires a parent or guardian to make transactions on your behalf until you are of legal age, at which point the account is transferred to your name.
Custodial accounts, much like a bike with training wheels, allow you to learn the process and gain experience. Ideally, you'll be able to steer your own economic course by the time you take over the account.
Additionally, there are some instances in which minors can invest directly, depending on location. For example, anyone who earns an income in the US can open a Roth IRA account, and both US and Canadian minors can open some form of savings account, albeit with an adult joint account holder.
You can also grow your wealth with something you use every day—a smartphone app.
Investment Opportunities for Teens to Explore
One of the biggest misconceptions about investing is that it requires a lot of money to get started—and that’s far from the truth.
Although wealth certainly offers a wider range of possibilities for investment opportunities, there are plenty of lower-cost options out there. These can help you get started with the process of building a portfolio or just parlay a couple of Benjamins into a larger amount.
Let’s take a closer look at what’s out there.
The Stock Market
Mention “the stock market,” and most folks immediately imagine a chaotic crowd of men, tugging at their ties and shouting into telephones as stock prices scroll on a giant ticker overhead.
This scene still occurs in physical locations known as exchanges, but these days, the stock market—like so many other business aspects —is largely decentralized. Whether through a broker or independently, many people buy and sell stocks online, possibly even in their pajamas rather than a pinstripe suit.
What are stocks, exactly? Essentially, they're teeny-tiny shares of a company.
When an investor purchases Starbucks shares, they automatically become a partial owner of the coffee juggernaut (albeit a very, very small part). As the business thrives, the price of its stock increases. When sales take a turn for the worse, its stock takes a corresponding fall.
Stocks are a good starter investment due to their low economic threshold. The cost of shares ranges from a few dollars (called penny stocks) to several thousand greenbacks for big-name players like Amazon, Google, and Berkshire Hathaway.
Another advantage of stocks is that it's easy and fun to track the trajectory of an investment.
You can learn some valuable lessons by playing the market, too. Riding out an ebb in stock prices takes patience, and analyzing the fluctuations of a stock, day-to-day or year-over-year, provides valuable insight into its industry and the economy as a whole.
Even better, as they are such a common starting point for new investors, a wealth of training or “play” stock markets exist where you can get a feel for how things work before you dive in with your hard-earned cash.
How Do You Pick a Good Beginner Stock?
While there are a few stock options generally considered “safe,” a good stock for one portfolio may not be so wonderful for another.
Here are five tips to keep in mind before you pick your first stocks:
- Decide what you want to achieve and how long you want to invest before buying anything.
- Settle on a risk level that you're comfortable with (we recommend a low-risk tolerance for beginners) and stick to it.
- Take the time to learn the basics. It may seem boring to spend time reading company histories, learning abbreviations, or trying practice stock markets, but this information will leave you better armed to succeed in your efforts.
- Keep your emotions in check—make your decisions based on facts.
- Pick a stock you're interested in. The best investors get to know the companies they buy stock in—they follow these companies closely and understand their intricacies. Be prepared to dive deep into the industry you choose.
Mutual funds are a natural next step to take after giving stocks a try.
In this arrangement, multiple investors pool their money to purchase shares of stocks, bonds, and short-term debt, known collectively as securities. As this portfolio earns money, the returns are distributed among the investors.
The benefits of mutual funds include:
- Low initial outlay of capital
- Diversity of investments, which lowers the overall risk
- Easily liquidated assets
- Professional management
Having a market expert curate and control the specific investments that comprise a mutual fund can be fruitful, as well as convenient. Mutual funds are a good choice if you’re interested in a more passive investment that doesn’t require a lot of research.
How Do You Decide What Funds to Invest In?
Deciding what funds to invest in comes with similar cautions to picking stocks—make sure you set goals, know your risk, have the basics down, act on facts, and find an industry that interests you.
However, there are a few other tips to keep in mind when moving up to mutual funds:
- Look for an experienced fund manager. With a mutual fund, you're letting someone else call some of the shots regarding your investment. Make sure you pick someone who has at least ten years of experience and knows what they are doing.
- Don’t ignore the expense ratio. An expense ratio measures a funds operating costs against its assets—so, generally, lower is better. A “good” expense ratio ranges around 0.5% to 0.75%.
- Rate of Return is about more than numbers. Unlike the expense ratio where you're looking for a set range, when looking at the Rate of Return, look for funds that have consistently out-performed other funds in the same category—proven winners.
- Pick a sector you believe in. Sectors refer to the types of businesses a fund invests in, and choosing yours is a great way to support movements you want to see succeed. For example, investing in socially responsible investing (SRI) funds would only progress ethically and socially responsible companies.
As we touched on earlier, a Roth IRA doesn’t require parental oversight in the US and allows you to earn interest tax-free on funds you save for your retirement.
Unfortunately, if you're in Canada, while there is a Roth IRA equivalent, the Tax-Free Savings Account (TFSA), you do need to be over the age of majority in your province.
Either way, paying the taxes on a contribution upfront means that the money can grow tax-free and that taxes won't need to be paid when withdrawals from the account are eventually made.
A Roth IRA or TFSA is like a gift to your 60-something self. This option might seem like a silly investment choice if you would much rather receive that gift now, but even small or infrequent contributions to an IRA/TFSA will make money to help fund one's retirement.
High-Yield Savings Accounts
As the name implies, this type of investment is an account that offers a high interest rate—usually 20 to 25 times as high as a traditional savings account offers.
Let’s say a young adult goes to their local bank and puts $2,500 in savings. A typical interest rate of 0.10% APY (annual percentage yield) would net them a measly $2.50 in one year, barely enough for a pumpkin spice latte.
On the other hand, a high-yield account with an online bank might offer an APY of 1.00%, resulting in an extra $25 after 12 months. That's a pretty substantial difference.
On top of that, you tend to see lower fees with online banks, since their overhead is much lower than a traditional, brick and mortar bank.
Of course, compared to most other investments, the rate of return on a high yield savings account is still pretty low. But, it's worth looking if you want to maximize your savings.
Another grassroots development made possible by the internet, microloans are an exciting way to invest money while also doing good in the world. Sometimes called peer-to-peer loans, these loans aren’t made by banks or other conventional financial institutions but by individuals.
They are attractive to would-be small business owners who have a history of bad credit, little or no collateral, or insufficient capital to cover startup costs. They're also helpful to entrepreneurs in developing countries, where traditional lenders and government-backed assistance aren’t available or accessible.
Peer-to-peer lending is inherently riskier than secured loans that require collateral, so they often have high-interest rates. This aspect makes them very attractive to investors who want to turn a quick, tidy profit. Moreover, you’ll be lending not just capital, but a helping hand.
Microloans, which are often brokered through services like Kiva or Prosper, can be made between just two parties in a literal peer-to-peer arrangement.
Alternately, they can be crowdfunded. Investors fund a portfolio containing multiple, diverse microloans, much like they would back mutual funds, to mitigate the loss that could be incurred by a borrower defaulting.
Have you ever been asked by a cashier at the supermarket or fast-food restaurant if you want to round up your bill and give the extra to charity?
This practice is a clever method of soliciting donations. Whether it ends up being five cents or 95, any amount less than a dollar usually seems insignificant to the individual shopper. To the charity that receives it, however, this spare change adds up fast.
Now consider rounding up every time you spend any money: filling your gas tank, getting takeout pad thai, splurging on a pair of designer boots. Now consider that the charity is you.
In this way, investing becomes a small, behind-the-scenes habit, rather than requiring conscious effort—or a more painful one-time outlay of cash.
Unfortunately, you do need to be at least 18 to open an account with most micro-savings apps (the minimum age varies by location and app). However, if you have a debit card for that joint savings account you opened, it can be linked to an account set up by an adult for your use.
Note: Acorns offers a family plan that's worth checking out.
How to Earn Money to Invest
Now that you have a few ideas on how to invest as a teen, you might be starting to wonder where you’ll get money to invest. This might mean, as a teenager, you need to make some tough choices. And (brace yourself for this one) create an actual budget.
According to Kat Peach of InvestorJunkie, budgeting can sometimes have a bad rap, and there’s a case for not EVERYONE having one. But she states that “if you want to become an investor, having a budget can be extremely helpful in saving money to use for investing” – and I tend to agree.
It’s not sexy, but if you want to have the means to invest, one of the first steps is learning how to start allocating your money appropriately.
Your first option for making money as a teen is the old-fashion way—a part-time job. Keep in mind, though, that your age will again play a large role in what you can achieve here. Nearly every country in the world has some form of labor law in place for minors.
In the US, beyond certain types of employment, such as cutting grass, babysitting, or working for a family member, you’ll need to be at least 14 years old. However, until you hit 16, you’ll be restricted in how long you can work.
In Canada, the minimum age varies more by province. Some areas, like Nova Scotia and Quebec, don't set an age restriction but do have other requirements, such as parental permission or a maximum number of work hours. Most areas require you to be between 12 and 16, though.
No matter where you are, make sure that the employment you choose doesn’t interfere with your schooling.
Another option is to work for yourself. We mentioned some of these options above, such as cutting lawns in your neighborhood, walking dogs, washing cars, house cleaning, or babysitting, but you have other options as well.
As they say, find a need, fill a need—and make enough cash to invest in your future (or back into your business). Okay, we added that last part in, but you get the idea.
Sell Your Stuff
Finally, if you're a bit of a packrat and find yourself with things you don't use, consider having a garage sale or selling some stuff online to get some startup funds.
You'd be surprised what some items can go for online—a single card from your Pokémon collection could bring in thousands or those designer jeans that don't fit you could collect a pretty penny rather than dust.
Just make sure that your parents are okay with you getting rid of whatever you put up for sale and that you do so safely. If you sell items in person, bring an adult, and meet in a public place.
Set Yourself Up for Success by Saving and Investing as a Teen
Every once in a while, a feel-good story about a teenage stock-market prodigy or a young adult with adroit business acumen will go viral. But it’s not necessary to be an entrepreneurial genius or even a finance aficionado to make the most of one’s money.
Rather, it’s relatively easy to get a head start on handling your own money—and do so responsibly. Even at 13 or 14 years old, you can explore investment opportunities, try your hand at playing the stock market, or simply download yet another app onto your smartphone.
Whether initiated by you or your parents, learning how to invest as a teenager is a first step toward becoming a financially responsible adult, both financially and otherwise.
Have you dabbled in the stock market or set up an IRA for yourself? Do you use a micro-savings app? What's the hardest money lesson you've ever had to learn? Tell us about your experience by leaving a comment below.
About Chris Muller
Chris has been a professional personal finance blogger since 2015 and is the co-owner of FullPocket – a financial site that's dedicated to breaking down complex financial topics into easily digestible pieces. With a business degree and the expertise he's gained over time, he's also grown a business that focuses on financial journalism, website monetization, marketing, SEO, and UX design/front-end development. He’s an entrepreneurial finance junkie who loves to teach others how to achieve financial success. Chris is currently in pursuit of FI/RE, is an aspiring minimalist, loves craft beer, and is dad to two kids.