Often we think of investing as something we start doing later in life. We think about putting money into a 401(k) when we join the workforce or opening a brokerage account when we have some disposable income. But you can actually get started a lot earlier than that. Families can seek out investments for teens to help pay for college, get a head start on saving for retirement, and more. And in addition to helping save for a teen’s future, it has the added benefit of instilling financial literacy at a younger age.
Why start investing for your teen
There are plenty of benefits to getting started with investing earlier in life. Here are a few reasons you might want to help your teen start investing (or get started yourself if you are a teen):
1. To pay for college
There’s no doubt that college is expensive. In fact, the cost of higher education has resulted in Americans nationwide carry $1.6 trillion in student debt. By investing as a teen, you can help set money aside to cover some or all of your college tuition without going into debt.
2. To take advantage of compound interest
Thanks to the wonder of compound interest, those who start saving for retirement at a young age are far more likely to have enough in the bank when they reach retirement age. In fact, data shows that people who invest a small amount early on can end up with more money than those who wait an additional decade and save a lot more money. And while it might seem premature to start thinking about retirement in your teen years, starting now can make a big difference.
3. To teach your teen about money or learn about money as a teen
There are clear financial benefits to investing for teens. Some of them are obvious, like more money in the bank. But there’s also the benefit of teaching your child about money at a young age. And in a time where financial literacy is severely lacking, this knowledge will be a huge advantage later in life.
How to invest as a teenager
When it comes to investments for teens there are a number of great ways to get started!
By investing in the stock market
Many traditional investing options aren’t directly available to teens. Minors can’t open brokerage accounts in their own name. But the good news is there are plenty of accounts that parents can open on their teen’s behalf. Let’s talk about some of the best investments for teens that families can look to.
A custodial account
This is a brokerage account that an adult can open on behalf of a minor. These accounts are set up under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). Parents and other adults can open the account, make contributions, and select investments. Then, when the child turns reaches adulthood (either 18 or 21, depending on the type of account), the account legally becomes theirs. There are some unique tax rules for the money you earn in these accounts, so be sure to consult a tax professional if you decide to open one.
A 529 plan
This is a college savings account that parents and other adults can open on behalf of a child. 529 plans are tax-advantaged, meaning contributions aren’t subject to taxes. And as long as the money is spent on appropriate expenses, you won’t pay taxes on the withdrawals either. Money from these accounts can go toward educational expenses such as college tuition, textbooks, computers, and more.
An Individual Retirement Account (IRA)
An IRA is a type of tax-advantaged retirement account available to anyone with earned income. As long as your teen has a job or a business where they earn income, they can contribute up to $6,000 (based on 2020 rules) into the account. The one catch is that the amount they contribute to the IRA can’t exceed the amount they earn. So if your teen earns $4,000 throughout the year, you as a parent can’t contribute $6,000 to their account.
By starting a business
One of the most educational — and the most fun — ways that your teen can start investing is by starting a business. Entrepreneurship is an investment that pays off for many people. And the number of teens starting businesses has increased in a big way in the past decade.
There are many benefits to starting a business as a teen. First, entrepreneurship can be an incredibly educational experience. It can teach teens the value of hard work, as well as how to fail gracefully. These life lessons can stay with someone forever.
In addition to the life lessons that teens can learn by starting a business, there’s the obvious financial benefit. Not only does an entrepreneurial venture provide a stream of income right now, but it can lay the groundwork for building wealth in their future. This can give teens more control over their futures.
By using a savings account
Teens can start saving and growing their money without a traditional brokerage account or tax-advantaged investment account. Even something as simple as a savings account is a great way to start. Teens can use a savings account to set aside money they make at a part-time job or receive as gifts. Parents can also contribute to their kids’ savings.
So if a teenager decides to start putting money into a savings account, what’s the best kind? High yield savings accounts, typically offered by online financial institutions, pay interest rates significantly higher (often as much as 100x more) than a traditional savings account. And while it’s not going to make you rich, it certainly adds up.
Putting money into a savings account in addition to brokerage accounts ensures your teen has savings that aren’t subject to the volatility of the market. It's also money that isn't locked into a specific purpose, like college or retirement. This type of account might make a lot of sense when it comes to saving for personal financial goals your teen has.
The bottom line
If you’re a teenager or the parent of a teenager, it may not have occurred to you to start investing. And while there might be different options available than there are for adults, it’s worth getting starting early.
Popular investments for teens include custodial accounts, college savings plans, and retirement accounts. But your teen also might consider some less traditional investment options like starting a business. And yes, there are plenty of financial benefits to getting started early. But what’s even more, you’ll set your teen up with life lessons that will benefit them forever.