Investing, essentially, is putting your money into something with the hope of a financial return, and it’s one of the best ways to build wealth and save for your biggest financial goals, from retirement to your dream home. While most people start investing as adults, investing as a teen can give you a huge head start on saving for the future and learning vital money lessons.
Investing may sound complicated, but it’s easier than you’d think to get started (yes, even for teens). In this article, parents and teens will learn the benefit of investing as a teenager, the best investments for this age group, and what accounts you can use to start investing.
Why You Should Help Your Teen Start Investing Early
Individuals who start investing as teens rather than waiting until later in life have a huge advantage over their peers, both in their potential returns and the knowledge they can gain from investing.
The money that your teen earns in their investment account can help them pay for college, buy a home, start a family, travel the world, start a business, and more. Not only does investing as a teen help young adults prepare financially for the future, but it also helps teach them financial literacy. By helping your teen to build their financial literacy from a young age, you may help them to feel more confident and less anxious about money matters later on.
What Teens Should Invest In
With so many investments to choose from, all of which have varying levels of risk, it can be difficult to know where to start investing. Below are some of the most common investments available to teens as well as some of the downsides you should be aware of.
High-Yield Savings Accounts
A high-yield savings account (HYSA) is the most basic way for a teen to start earning a return on their money. Savings accounts have been around for a long time, but more financial institutions now offer high-yield savings accounts, which offer a higher interest rate than a standard account. With a higher interest rate, your funds will grow more than they would in a typical savings account. Unfortunately, even savings accounts with high yields have very low rates of return, compared to other investments.
Certificates of Deposit
A certificate of deposit (CD) is a banking product similar to a savings account through which a teen can earn interest from their savings. The key difference is that CDs require you to keep your money in the account for a specific period of months (or even years) to earn the promised interest rate. Then, when you redeem the CD at maturity, you’ll get your money back in addition to the interest your account earned. Like savings accounts, CDs are considered a risk-free investment because the money is insured by the FDIC up to $250,000. The downside, however, is that your money is essentially locked up for a period of time.
A stock is a way to take a piece of ownership—also known as “equity”—in a publicly traded corporation. When you own a stock, you become a shareholder and part-owner of the company. Investors can earn money from dividends that companies pay to their shareholders as well as through capital gains when the value of the stock increases.
For parents and guardians, experts recommend adding stocks to your child’s portfolio as a complement to more diversified investments rather than building a portfolio entirely of individual stocks. Stocks tend to be volatile assets, meaning they can undergo major price shifts in a short period of time.
A bond is a type of debt security. When you purchase a bond, you’re essentially lending money to the issuing company or government entity. While bonds might not necessarily be as exciting to a teen as stocks, they’re generally more stable investments, meaning they help to create a well-diversified portfolio. Bonds usually provide a fixed income, thanks to the interest payments the bond issuer makes throughout a set period of time.
Funds, primarily mutual funds and exchange-traded funds (ETFs), are popular investments that allow you to gain exposure to many different securities in one investment.
Mutual Funds: A mutual fund is technically a type of investment company that pools the money from many investors to create a well-diversified portfolio. Each investor is part owner of the fund, with a share in its profits and losses. All mutual fund orders are settled at the end of the trading day, regardless of when they were placed.
Exchange-Traded Funds (ETFs): An ETF is another type of pooled investment that allows investors to add many securities to their portfolio through a single investment. One key difference between ETFs and mutual funds is that ETFs trade throughout the day like stocks. Like a stock, you can buy one share of an ETF and have more control over the price.
Opening an Investment Account for Teens
If your child is under 18 years old, the most effective way to start investing for or with them is to open a custodial account. With this type of account, an adult “custodian” opens an account and can save and invest money on behalf of the child. Then, when the child reaches adulthood—either 18 or 21, depending on the state—they’ll take full control of the account.
The Bottom Line
Most people understand that they should be investing, but many may not have considered the benefit of investing for or with their teens. Getting teens started with investing at a young age can help them to build wealth and financially prepare for the future as well as provide them the financial literacy they will need to succeed later in life.