At a certain stage, most teenagers reach a stage when they stop relying on allowance and begin earning money of their own. These first few paychecks offer a great opportunity to begin teaching your teens about investing.
Investing can be complicated, but it does not have to be. No one expects a teenager to become a billionaire hedge fund manager before they turn 20, but if someone starts investing as a teenager, they can find money lessons that only become more valuable as they grow up.
Let’s take a look at some things teenagers and their parents can do to get started with investments.
Investing Guide for Teens (And Parents)
- Study an Investment Returns Calculator
Among the most powerful things you can do when introducing teens to investing is getting them to understand the benefit of time in the marketplace.
One approach to help teens understand the powerful effects of time is to use an internet calculator that could simulate different investing scenarios. These calculators let you customize variables such as the amount you plan to spend each month, the number of years you intend to invest, and the expected rate of return. CalcXML.com offers a number of financial calculators that can help teens understand various financial scenarios, but that is only 1 instance of a source.
This exercise is especially important for teens because it’s clear that the best way to collect large sums is to start early, on account of the energy of compound returns.
- Purchase a Stock (Any Stock whatsoever )
While it’s true that most people–especially teens–should avoid the practice of”picking stocks,” it can be a great education for somebody beginning. Picking individual stocks and watching them over several months can help teenagers learn a great deal about the way the markets operate. This lesson can be worth more than relative gains that would happen to be earned by using an automatic investing service.
Consider letting a teenager buy some shares of stock in a business of their choosing. Have them check in on the stock’s performance today and then, and also help them understand why the stocks gained or lost value.
Many brokerages make it possible for investors to purchase partial shares in companies, so teens won’t need to gamble that much money on their own choices. They can put in $10 here and $10 there and determine exactly what happens to their money.
Most brokerages require customers to be at least 18 years old. When the teen learning how to invest is under 18, the parent will likely have to be the one buying and selling the stocks. They could do this in their brokerage account in coordination with the teenager’s decision, or else they could establish a custodial account.
A young man must first realize that stock investing, at its core, is owning part of a company. If the firm does well, the investor does well, and vice versa. This is a powerful point to learn. It may be exciting to say they’re a part-owner of Disney, McDonald’s, or Coca-Cola, and it is even more intriguing if that tight possession actually makes them cash.
- Invest in a Low-Cost Fund
Once teens watch their stock choices for some time and produce a simple comprehension of markets, then they should move onto mutual funds or exchange-traded funds (ETFs). These funds allow an investor to put money into a broad collection of stocks and distribute their investment risk.
The top options are funds that offer broad exposure to the stock market with very low expenses.
As a teen watches their fund investments and compares the operation to their individual stock selections, they will learn about the benefits of diversification. They’ll also learn how to estimate the fees and holdings of a fund.
- Open a Roth IRA
While it may be hard for teens to imagine retiring, parents need to make an effort to teach their children the importance of saving for retirement. Investments held in these accounts grow tax-free, so long as you wait until age 59 1/2 to draw it.
To educate your child on the importance of investing for retirement, then run through hypothetical situations. Show them the way maxing their Roth IRA gifts beginning at age 18 differs from a scenario in which they don’t begin maxing out their Roth IRA contributions until age 30.
- Open a High-Yield Savings Account
Teens should also learn that it isn’t sensible to put 100% of your money in stocks. It is a good idea to keep some of your money in cash, but that money can still get some return. This is a chance for them to learn how interest rates work.
Since adolescents are inclined to be tech-savvy already, they’ll probably have no problem finding an internet savings account that provides relatively large rates of interest and an intuitive app.
These online savings accounts are intended to promote saving. They frequently don’t allow you to withdraw cash with an ATM card, and most will not even let you write checks. Teens can deposit a portion of their earnings into this account and begin on the path to savings.
- Start a Small Business
You do not want your teenager blowing off their whole savings on a speculative venture, but it might be beneficial to educate your teen on the basics of what it means to invest in their own enterprise. They might have an idea for an Etsy shop, or they could try marketing a lawnmowing business around the area. This might help them learn business essentials such as purchasing inventory or equipment, tracking expenditures, deciding on costs, and logging earnings. There are various examples of teenagers who have gotten rich through entrepreneurship, but if your teenager is not likely to be about”Shark Tank” tomorrow, they could still find out a bit about how to make money via self-employment.