For various reasons, children should save money. The most significant benefit is that they now have more time to watch their assets grow and become more valuable, thanks to the time value of money and compounding.
Teenagers also bring their own generation-specific activities, interests, and values to investing. They may have their own preferences for choosing firms to invest in based on the products they sell, how they operate, or their brand.
Millennials and Generation Z were particularly active in supporting environmental, social, and governance (ESG) investing. This is because they used their investments to express their views on issues such as social justice and the environment.
It can be not easy to know where to start, but it doesn’t have to be. Before young people begin investing, there is a lot of advice and instruments that might assist them. We’ve compiled a list of the most important things kids should know about money, which you can read here.
Some people may believe that children who are not yet legal adults cannot spend money. There are age restrictions at casinos and bars, but not on spending. You must be at least 18 years old to open your own broking account, but there are various methods for those under 18 to invest, even if they must work with an adult or be supervised in some way—three significant points.
- Individuals under 18 can begin saving and investing with the guidance of a responsible adult.
- Investing at a young age provides significant benefits due to compounding.
- Many brokerages and trading platforms have age limits, but there are apps designed specifically for teen investors.
Why investing early is vital.
Teenagers and young adults have an edge because they can invest and see their money grow faster if they start early. The strength of compounding makes this early-mover advantage even more valuable for younger investors.
If you reinvest your capital gains and interest, your account’s value can increase rapidly. This emphasises the importance of starting savings early while time is still on your side.
A straightforward example demonstrates why getting up early is a good idea. As soon as you start working, say, at age 22, you begin saving for retirement.
If you save $100 every month and earn a 10% return on your investment (added up annually), you will have $710,810.83 when you reach 65. However, if you had started saving when you were 15, you would now have $1,396,690.23, nearly double the amount.
Want to keep helping your child develop healthy financial habits? See what else we have in this series, how to Help Teens Learn Good Financial Habits, and Custodial Accounts.
An adult oversees a minor’s investments until the minor reaches 18 or 21, depending on the state. Custodial accounts established under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are an excellent way to send money to a child or adolescent.
Still, the adult in charge of the account remains legally liable and has final control over the investments.
A Roth individual retirement account (Roth IRA) allows people to begin saving for retirement as early as the age of 18. To start contributing, they must have earned income from a job or another paid activity.
There are also joint brokerage accounts that allow kids to own an account alongside an adult legally. This may inspire younger individuals to become more involved, while the older co-owner typically approves financial decisions.
Are You Prepared to Put Money Away?
Saving when you’re young can be beneficial, but some kids may still be unsure whether they’re ready to take the plunge. To determine if now is an appropriate time for children to make their first investments, ask yourself the following questions:
- Do you have any money saved from a job or anywhere else that you won’t need right now?
- Are you prepared to lose this much money if your transactions do not pay out?
- If you are under the age of 18, can you invest with the assistance of an adult (such as a parent)?
- Do you know what you’re doing? Are you sure you understand the trade you want to make and how it works?
Adams claims that the companies youths frequently interact with can pique their interest in investing. One method to enter the stock market while adhering to the crucial recommendation to “invest in what you know” is to purchase shares of a firm you already know.
Adams clarified: “Working for a company that you see often makes you interested in how they work, how they grow, and how they make decisions.” “Once you grasp that, you should delve deeper and ask yourself: Do I believe this is good? Is this heading in the correct direction? If so, do I have the money to invest in it?”
How Risky Is It to Invest?
Young people should understand the advantages and disadvantages of spending early and often. The significant disadvantage of trading is that you can lose some or all of your money.
There is no avoiding the fact that you may lose money, but you can choose how much risk you want to take by investing in different things. In general, the riskier an investment, the more probable it is to yield a higher return.
All investors, young and old, must understand this trade-off to select a strategy. However, there are some advantages to being young. Younger investors may be able to take more risks because they have more time to participate in the markets. This implies they may receive more money back. Younger investors have time to wait for the markets to recover when they fall, which they will.
This is why old investment advice suggests being riskier when your goals are far away and less risky as the time to accomplish them approaches. However, as an investor, you must develop your own style and ensure that you are comfortable with the level of risk you are taking, regardless of your age.
Adams went on: “I think you need to be honest with yourself about how much risk you are willing to take.” “Don’t do what they suggest if you don’t feel comfortable doing it. For example, if they say, ‘You’re young, take risks and let it grow,’ don’t do it. You should look for options with lower risk, which may have less potential and downside.”
QUICK FACT
An account set up for someone under 18 can help them start saving for retirement early. In a custodial account, an adult oversees a minor’s investments until the minor reaches 18 or 21, depending on the state. Keep in mind that the terms and conditions for different account types may vary depending on the bank providing the service.
What Can Teens Invest In
Once you’ve determined your risk tolerance, you can start investigating investments that have the attributes you believe will best help you achieve your objectives. Depending on your goals and time frame, below are some of the most common asset classes you could consider purchasing.
Stocks
When you buy stock, you acquire a small portion of ownership, or equity, in a publicly listed corporation. Stocks can help you make money in two ways:
- Several corporations give dividends to their stockholders.
- Stock prices fluctuate based on the market’s assessment of a company’s worth. If the cost of your stock rises, you can sell it for a profit.
Stocks can be dangerous due to their volatility or fluctuations in value. If the company in which you invested begins to fail, you may find yourself with shares worth less than you paid for them. However, with additional risk comes greater potential profits, making equities an appealing investment for young individuals with longer time horizons.
Funds
Equities indicate a share in a particular company, but you may also purchase shares in funds that invest in a variety of equities and assets.
Mutual funds, managed by experienced money managers, invest in a variety of assets in line with the objectives outlined in their prospectus. Exchange-traded funds (ETFs) hold a variety of investments but are structured to track a particular market index, sector, or other asset. Unlike mutual funds, they may be traded on the stock exchange.
Funds provide various advantages to young investors. Funds provide inherent diversity by combining multiple investments. In other words, investors in a fund automatically hold a diverse range of assets, so even if one component loses value, their investment is not entirely wiped out.
While some mutual funds charge high fees for actively managing the portfolio, passively managed and index-tracking funds often have minimal costs and a track record of generating consistent returns, particularly over time.
5 Steps To Begin Investing as a Teen
What happens next when a young person decides to invest some of their money? Here’s a step-by-step approach to help kids begin their investment journey:
- Learn about investing. There are numerous online and printed resources to assist you learn the fundamentals. You might also ask your parents or another experienced investor to share their information.
- Identify your investment objectives: Be clear about your end aim. What would you like to do with the money? Is your aim far off in the future? Setting specific goals will help you develop an investment strategy that works for you.
- Select investments: Researching prospective investments might be overwhelming. It is critical to ask yourself what form of investment has the best possibility of helping you achieve your objectives.
- Open a broking account to acquire and hold your financial assets. If you are under the age of majority, you will be unable to register a brokerage account on your own. However, you can open a custodial or joint account with a parent, guardian, or trusted adult to begin investing.
- Invest: Execute your investment strategy. The method may differ depending on the investment you’ve chosen, but you should be able to purchase practically any asset through your broking platform’s website or mobile application.
How Do You Invest If You’re Under 18?
If you are under 18, you cannot be the only owner of a standard broking account. However, with the assistance of a parent, guardian, or another trusted adult, it is never too early to begin putting your money to work for you. With adult supervision, you can open a custodial account in which the adult administers your investments until you reach the age of majority. At this point, you can take official ownership. Alternatively, you can create a joint account in which you and another adult legally share ownership of the assets.
Is it illegal to start investing while you are under the age of 18?
Although there are some limits, no laws prohibit persons from investing while underage. Minors are generally unable to open their own brokerage accounts, but custodial and joint accounts allow them to begin their investing journey with varied levels of parental supervision.
How Can I Build Wealth at 16?
It is never too early to consider your long-term financial prospects. There are certain restrictions on how you can invest at 16, but you can get started quickly with the help of a parent, guardian, or another responsible adult. Traditional wisdom holds that at a young age, you can afford to take more risks with your assets, thereby maximising your profits over time. In reality, this means focusing on stocks and funds with the potential to appreciate over time.
What is the Child Poverty Rate in the United States?
Child poverty rates in the United States have changed over the decades, but they remain persistent and structural. According to the United States Census Bureau, child poverty is higher than the national poverty rate. In 2023 (the most recent data), child poverty was 13.7%, whereas the national rate was 11.1%.
Black, Hispanic, American Indian, and Alaska Native children experience higher rates of poverty than their White peers. This means that for many children and young people, finding resources to invest may be more difficult than for other groups.
