Investing is the process of buying assets with the intention to profit off the growth of the asset over time. The asset can be sold for profit or purchased as a source of future income. Some of the popular assets you can buy today include bonds, Exchange Traded Funds (ETFs), annuities, certificates of deposits and stocks.
Investing is essential for growing your wealth and can be quite useful. Technology through the internet has made it possible for you to have information on trading markets all over the world. Therefore, anyone can start investing their money no matter their age.
You can never be too young to start. There is no excuse.
Here are some smart investing tips for teens:
Increase your knowledge
Like every other human endeavor of some importance, adequate preparation is non-negotiable. To start investing, you have to arm yourself with the necessary knowledge.
The best way to go about it is by reading up on investing. There are tons of materials – books, magazines, websites, journals and news on investing out there. By reading, you’ll learn about all the markets worldwide such as the Tokyo Stock Exchange and the New York Stock Exchange. You’ll also learn investment strategies and how to assess an asset before you buy it.
Even Warren Buffet and other investment gurus were not born with the knowledge, they had to learn just like anyone else.
You do not have to learn everything. Focus on a couple of investing tools and strategies that you feel will work for your current financial situation. As you start your investing adventure, other investing knowledge will come your way eventually. Therefore, you should set to learning all you can about investing but don’t expect and try to learn everything.
Work for your Money
You will not really learn to properly value money until you start to earn your own pay. The best way to understand the value of money is by working for it so long as it doesn’t interfere with your education. School breaks are excellent opportunities for any youngster that is determined to master the money game to work.
Working as a teen provides you with valuable knowledge and experience which will jumpstart your assimilation into working life. The money saved from your labor will be the seed money that will help you on your way to financial success through investing.
Aside from management skills, working whether part-time or in the summer is a great start for any teenager. You will learn to be more independent and will get you started early with networking, which is an important step for success.
Start to Invest
Now you have read up on investing and started following investment news, it’s time for you to wet your feet. There are a variety of financial accounts that your parents or a guardian can help you set-up. Here are some of the best options to look into:
A Roth IRA
Once you start your first job, even if part-time, you should start a Roth IRA with after-tax income. A Roth IRA is a retirement account which allows an individual to set aside a certain amount of their income each year. You’d probably say that you’re not ready to retire, but know that no one is too young to save for their retirement.
A Roth IRA makes sense for a teen because their marginal tax rate is meager. The minimum investment to open an account with investment firms varies from $1,000 and $2,500. If you haven’t saved up that much, you can keep the money in a high-yield saving account for the time being. For some accounts, you can start with less than the minimum opening amount if you set-up an automatic monthly transfer from your bank account.
Roth IRA differs from the traditional IRA in that they allow for the tax-deferred accumulation of investment earnings, meaning they are not subject to annual capital gains. They also allow you penalty-free withdrawals for educational purposes or the purchase of a first-time home.
To get started with Roth IRA, you can visit your local bank, a brokerage or other financial institutions. You can even easily open an account online and start monitoring your investments in no time.
When you open an account, you will be presented with a variety of investment options. Now, this is where it gets a little trickier, especially for teenagers who are still in the process of learning. My suggestion would be to choose an option that’s less risky for now and learn as you progress. You can always change your investment funds whenever you feel you are ready to do so.
ETFs or Exchange Traded Funds are an increasingly popular way of investing in the financial market. An ETF is an investment fund which is traded on the stock ETFs usually track equities, bond index or a commodity, and there are no direct exposures to these assets.
They are also traded like equities in the stock market which means they can be traded at any time during market hours. However, unlike a stock they are not individual business instead they are grouped into different categories. A single ETF can be a combination of bonds, equities, commodities, and other financial instruments.
ETFs are an attractive investment option for teens because of their tax efficiency, stock-like features, and low cost. It even requires a smaller amount to start than mutual funds. And unlike mutual funds, ETFs are flexible, and you can redeem them at any time you want.
Since they deal with market products, ETFs are medium risk options. However, there’s a small risk of your assets going for less than the principal. These assets offer a diverse portfolio which is critical to long-term investment success.
Savings and checking accounts
Most online banks offer higher interest rates than traditional banks. But interest rates aren’t the main reason for opening bank accounts as a teen. The purpose of this account is to help you learn money management fundamentals. Teenagers can open an account in their own name, but most banks will prefer a parent or guardian co-sign with the teen.
We co-signed with our kids when they first opened their savings account at our local bank. If I can still remember it well, we opened the account for them when they were seven or eight years old. All the money that was given to them as gifts for their birthdays and Christmas Holidays were all deposited to these savings accounts.
One of the most popular online savings banks is Ally. According to their website, they are rated as the best online bank by Money Magazine in 2018. Another option would be to check out this list of online best online savings account for 2019 at Bankrate.com.
One obvious advantage of a savings account is it is a liquid account, which means you can access your money any time you need it.
Index mutual fund
Teens can now open a Roth IRA with a minimum investment – with the money saved up from working part-time. Then he or she can choose which investment but a Roth IRA is an account for holding or retirement fund and not a typical investment in itself.
Teens are better off starting investing with an index mutual fund. And even for grown-up, a portfolio of only index mutual fund is a good idea for adults. Index mutual funds provide broad market exposure, have low operating expenses, low portfolio turnover and do not try to beat the market.
With index funds, you get the advantage of broad diversification. For example, if you’re index fund tracks the S&P 500, it will be 500 companies, which represents more than 50% of Americans value of stocks. If one sector goes up and another goes down, your investment will still be fine simply because you have an investment in every sector of the American economy.
529 college savings plan
One of the best way teens can invest their savings is the 529 plan. It’s a college savings plan with tax and financial aid benefits. These are money that gets invested in after-tax dollars which then gets invested into an investment account. If they are used for a college education or K-12 they come out as tax-free. They are just like the Roth IRA, but the Roth is for retirement and the 529 plan is for a college education.
A college education can be quite expensive, so it’s important to start early to grow funds for it. The 529 plan offers stable returns and is moderately risky.
For operational ease, each state has its unique 529 plan system to help save towards college. This savings plan does not carry a tax liability until they are withdrawn to pay for college. The plan has flexible limits for contribution, and the upper limits can be high. There are also gift and estate tax benefits accruing for this plan.
Investing in stocks gives you part ownership in a company. The value of a stock changes all the time. When the price of a stock goes up, your investment increases in value. And if the price falls, the value goes down as well.
For teens, their first foray into owning stock should focus on companies they can relate to. The winning strategy is to carefully curate investment opportunities to maximize returns and reduce risks to the barest minimum.
Stable and sound blue-chip company’s stocks are an excellent choice for teens.
Investing takes some time and effort to master. But it’s a veritable way to grow wealth. It’s therefore essential to start early – and the teenage years are the best time. Teens should start with low-risk investments like savings accounts and certificate of deposits, and as they accumulate more savings and gain experience, branch out to higher risk investments like stocks and ETFs.
It doesn’t take a lot of money to start investing profitably because the power of compounding interest can grow a small savings substantially over time.
The focus of investing for teens is not so much for profit, but rather, more of an education in investing. And since most teens do not have a lot of money for investing, the opportunities presented in this article focused on those with lower processing fees and lower minimum investment amount so as not to erode profit with processing fees, taxes, and charges.