Investing for Teens: It’s never too early to start investing your money

Daniel Penzing
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There are a number of ways you can invest even as a teenager.

If you’re just getting started on your investing journey, here are a few of the easiest places to start.

In this Guide:

  • Statistics and data
  • How should teens think about investing their money
  • Investing options for teens
  • Investing Dos and Don’ts

This guide will help you answer the question “where should I invest my money?” It’s time for you to take control over your financial future and stop making excuses that profit millionaires have been using for decades.

Understand the Roadblocks of Investing as a Teen

When it comes to investing, they say the youngest you can start is the best.

An adolescent who starts investing does not have to depend on his or her parents to manage the money. It encourages the teen to develop a long term mindset which is crucial in managing money.

But you can only have the experience of investing if you are able to get past the first barrier, and that’s avoiding the impulse to buy frivolous things. Teens do not have a good financial track record.

This is because they tend to spend their money on things that they want rather than on things they need. The long term financial goals of an investor such as retirement are not relevant to a teenager because they are decades away.

A teenager’s immediate goal is too get a Smartphone, to go to a party, or to buy concert tickets. Thus, impulse control is the one skill which can help a teenager bypass the barrier.

The best thing to do is for the parent to show the teens the value of saving a small amount of their money. That way the teen can see that saving small amounts is the first step towards investing.

Parents tend to be eager to have their teenagers to start investing in stocks so that they can see the value of long term investment. But this is not always the best course of action.

How Can You Get Around this Roadblock?

Unfortunately, there is not a clear cut answer to this question. There are a number of points that you should keep in mind and relate to the situation to decide how to proceed.

But to put it in a nutshell, if a child has attained the age of 16 or has earned income on his or her own (from a part-time job or any other source), the child then has the capacity to make a decision with respect to the gift. Offers to contribute may still be made by the donor or else the child may still make the decision on the basis of other factors.

The final factor is if the child is above the age of 18 (as per Gift Tax provision), he or she then can give it on your terms.

If he or she is below the age of 18 then there is no tax implication at all and the gift is not subject to Gift Tax.

How Custodial Accounts Work

While most investments should only be considered by adults, there’s one exception: a custodial account. Managing an investment account for another person is complicated, especially if you’re taking care of a child (under 18) or another individual, such as a mentally disabled adult.

A custodial account involves a trustee and a beneficiary, and can be a good option for anyone with a child who’s in need of a financial boost. It’s a good way to teach kids about responsible investing while helping them develop an important financial skill.

Investment accounts are one of the best ways for teens to open a dialog about money and build credit as they get ready to transition into adult life. Here are some key rules to remember while opening and maintaining a custodial account.

The Best Custodial Accounts

If your young adult loves to watch the stock market, they could be the perfect candidate to start investing. If you don’t know how or where to start, consider opening a custodial account for them. A custodial account is a type of registered, long-term investment account that allows you (as the custodian) to make investment decisions for a minor.

A custodial account is an investment account that is owned and controlled by a custodian for the benefit of a minor. Custodial accounts are irrevocable.

An account owned by a minor is a custodial account.

Custodial accounts can’t be opened at a bank. They can be opened at a brokerage.

The assets in a custodial account are considered to be owned by the minor up to the time the minor becomes legally an adult at age 18. This setup allows parents to start investing for college if they’re saving for it early.

In most states, the custodian will be able to control, buy, and sell investment assets. The custodian will also control all withdrawals, including distributions from the custodial account for the benefit of the minor.

Learn to Diversify Your Custodial Account

When it comes to your finances, nothing beats the old adage “spending less than you earn.” This philosophy is such an important part of creating wealth because it ensures you can pay your bills and avoid becoming buried in debt. That’s just the first step in the process. The next step is to put some of that hard-earned cash into investments, so you can make even more money.

It’s never too early to start thinking about investing your money, though. The earlier you start your investing education, the better.

Here are some young investors to watch.

They all started investing when they were teens, and you can too. It’s never too early to start putting that money to work for you and earning lucrative returns.

When it comes to investing, it’s always a good idea to diversify. That means investing some money in stocks, some in bonds, some in real estate and some in other types of investments. Diversification ensures you’re somewhat insulated from risk, since there’s no guaranty that any one investment type will always perform well.

A good place to start your teen’s investing education is to help him or her be more strategic about how to diversify their custodial account.

Start With Stocks

When most people think about investing in order to grow their wealth, they automatically jump to the stock market. That’s not surprising since everyone has heard about the great riches that can be earned from investing in stocks.

But not everyone can invest in stocks. As a matter of fact, it’s classified as a high-risk investment because of the volatility involved. Even for those who have significant capital, the risk of losing significant sums of money due to stock market crashes is just too high.

If you’re a teen who is starting to learn about finance, you have a much better option to get your feet wet … mutual funds.

Mutual funds are investment funds that invest in a portfolio of stocks, bonds and other securities. They are known for their low risk and steady returns. This makes them a great investment for people just starting out. You can even open an account with small contributions to test the waters.

Move on to Low-Cost Mutual Funds

First time investors are often tempted to go with the bare bones stock and bond fund because it is less complicated to pick one than a balanced fund or an ETF. But not only will you lose out on growth opportunities in your options, you’ll also be taking an unnecessary risk by investing in something that may not even be liquid.

Bare bones, low-cost investments are appropriate for people who know that they have a long time horizon before they need their money. So if you’re planning to save up for your retirement in 20 years, that’s the right fund to use. But if you’re a teenager who expects to need your cash in five years from now, it’s probably better to move on to something and liquid, low-cost, and balanced investment options that provide a better rate of return.

If you’re looking for a mutual fund that provides low-cost, liquid, diversified investing, there are plenty of great investment options for both teens and adults. Mutual funds are a great choice if you’re truly interested in investing your money. Not only are they much more liquid than some ETFs but they also have a management and trading history that can help you predict how well your investment will perform.

Open a High-Yield Savings Account

One of the most important steps to get started in the stock market is opening an online high-yield savings account. It’s important to know that the stock market, although it might be the place to hang your long-term hat, it is not necessarily a place to hang your short-term wallet. Once you open your account, you want to put your money to work for you by investing it.

You’ll want to keep your money in cash when you first open your account until you understand the trends of the market. You’re going to want to make sure that you have enough cash on hand to buy some blue jeans, toilet paper, and snacks for the week while you keep the rest of the money invested. Once you can understand the trends in the market a bit better, and you get the hang of the basic day-to-day operations of dealing with the everyday fluctuations of the market, you can start putting more of your money to work.

Use a Microsavings App

One way to invest for teens could be with a microsavings app. It will help you save a little bit of money at a time. This will make it easy to invest your money and not think too hard about it. Plus, if you lose your phone or break it, you are not going to lose all of your money along with it.

This method will also teach teens about the power of saving. They will have to think about their savings and be mindful with their money every time they take it out of their account.

If a friend wants to go out to eat, they will be responsible for paying their fair share.

Choose the Right Custodial IRA Plan

There are plenty of educational resources telling you what a great deal an IRA is for your kid – but the problem is, unless you become very wealthy, your kid's IRA is going to get a reasonably small amount of money, so one of the biggest IRAs is going to be for them. Since kids don't have credit cards, and are young enough that they may have a hard time affording day-to-day stuff, it might not do them any good. So instead of just telling you to put your kid's money in an IRA, you need to know why you're doing it and how much you're putting in.

The tax advantage of an IRA for a child is that the investment growth is not taxed. If you have a taxable account, those interest payments get taxed, so they're not tax-advantaged. If your child makes a lot of money and has high taxes, then they might be better off with a Roth IRA and paying the taxes early instead of when they retire. So the Roth IRA is also a good idea for kids with a high likelihood of higher earnings.

An ideal investment is a balanced mutual fund, where they can get access to certain mutual funds in a tax-advantaged environment and potentially grow money by going into the market. A mutual fund with a kids structure is designed to allow the child to take money out at certain points. So they're not fully locked in until retirement.

Custodial Traditional IRAs

Custodial traditional IRAs are a great way for parents to pass down assets and to teach teenagers the importance of saving.

Although you can’t contribute to a custodial traditional IRA for your kids, your kids can contribute. So if you’re going to leave money to your children in your will, this would be an excellent vehicle for doing so.

The key for the Roth IRA is that an adult must fund the account. That person can be a parent, grandparent, aunt, uncle, sibling, cousin, spouse, step parent and so on.

Tax Equity and Fiscal Responsibility Act of 2010 Taxes

The biggest hurdle to getting much value out of a Roth IRA is the Account Holder. This person decides how to invest his or her assets. That means that most kids will end up just putting their money in a savings account or a CD.

If you are a parent, grandparent, aunt, uncle, sibling or a person who has influence on how these assets are managed, it’s important to make sure that the investments are in mutual funds, ETFs or stocks.

If an Account Holder is under the age of 18, there are two ways to fund the account. You can either make a contribution up to the maximum allowable contribution or rollover an existing IRA from someone else.

Custodial Roth IRAs

Custodial Roth IRAs is the perfect investment vehicle for teens who are only in the accumulation phase of their lives. The Roth IRA account is his investment vehicle. In these accounts earnings are tax free if they are held for the required five year period.

How does it work? Well, the teen files a tax return and elects to open a Roth IRA each year. He can open it as a custodial account at a brokerage firm, at the bank, or online. The parents name the teen as the custodian of the the account. He then manages the funds in it.

The parents open the account and make the contributions to the account. They cannot directly contribute funds to it, only their income can go into the account.

Although it is a custodial account, the parents are the ones who are responsible for making the contributions to the account. The account would never be closed by the minor until he reaches the age of maturity which is twenty-nine years old. When the parents fund the account the taxes are deferred till the funds are withdrawn out of the account.

The custodial accounts are very beneficial to the parents as well as the minor because they can help to lower the income tax and also they would be able to attend the financial needs of the minor including his college funds or other expenses.

Consider Taxes & Fees

You want to earn interest on your investment, of course, but you also want to plan for taxes and fees by using a low-cost index fund, such as Vanguard’s S&P 500 Index ETF, VFINX.

For younger investors, tax considerations are especially important. Under the current tax law, your income will likely be taxed at your parents’ tax rate until you are 21.

During that time, you and your parents might jointly own an investment. You might own an investment outright for a while, until you sell it and realize a capital gain. Or you might own an investment jointly with your parents and ultimately decide to sell it after you have become a joint owner with your spouse or someone else.

None of these scenarios will affect how your investment is taxed – but if you are investing the portion of your take home pay that your parents don’t have access to, you will want to have some tax-efficient investments available.

Start Sooner Rather Than Later

The Benefits of Teenage Investing

Can my teen start investing?

Teens have seven decades to prepare their investment portfolios. For the first 15 years or so, their focus should be on achieving a healthy weight, doing well at school, and acquiring good interpersonal skills. This is important because it will give them a good base on which to build their future. Someone who has not yet developed their human capital but has managed to build a secure net worth is a contradiction in terms. This is especially true with investing.

A young person has a long time horizon. This means that they have the opportunity to hold stocks for many decades, if they desire, in the hope that they continue to grow in the future. This is because the very young have a much longer time horizon than young adults. It is very likely that they will want to sell the stock by 20 years from now, as they enter the workforce in earnest. For now, they are in the process of building their human capital, and this is why you should not be rushing them.

Young people have the time to do thorough research. This is because they do not have demanding job schedules that require their time. This is very important, since research makes companies so much more interesting. Younger investors can spend the time to find out everything there is to know about the company, its products and services, its competitors, and so on.