And teens need to learn how to do it too, so they’re prepared to grow their net worth as they get older. Allowing them to experiment with investments is a great way to teach them how.
In this article, I’ll review some of the best investments for teens. This should help your teen learn about investing without a lot of risks.
Table of Contents:
1. Open a Savings Account for your Teenager
Some of you may roll your eyes when I suggest a savings account. But, this is a great way to prepare for investing without the stress of researching stocks. You don’t even have to have an understanding of the stock market.
Additionally, many companies need a minimum to invest. And the best way to start investing is to make sure that you have all the money you need to get started. Most teens end up opening a savings account at the same bank their parents use. While this makes life a lot easier, there are other options.
The main benefit you’ll see when you encourage your teens to choose an online bank is you can’t easily make a withdrawal. This can prevent your teens from impulse purchases. Which not only can derail their plans for investing but will also be the cause of a lot of regrets.
Having money in a place where it’s not easily accessible is very much like having it invested in stocks or bonds. And it will give your teenager a taste for the future. I’d recommend taking a look at the American Express® Personal Savings Account. They currently offer a 1.00% Annual Percentage Yield (as of 06.25.2020) and require no minimum deposit to get started. There’s also no monthly maintenance fees, meaning teens won’t lose any of the money saved to unnecessary bank fees.
2. Teach them to Invest with a Roth IRA
One of the best ways for teenagers to start learning about investing is by setting up a Roth IRA. You have to invest in a Roth IRA with after-tax income. So, teenagers must have a job before they can invest in this type of IRA.
The type of jobs most teens hold during high school gives them a low tax rate, too. This makes a Roth IRA the perfect vehicle for investing and learning how to save for the future.
Different investment firms will have different minimums needed to open a Roth IRA. So it’s essential you help your teen find the best option for them. One option is Vanguard, which has a minimum investment of $1,000. While Fidelity requires $2,500.
And by investing now when they’re still young, teens can see amazing benefits by the time that they retire. By then, they’ll be ready to start taking money from their investment accounts.
Tip: Betterment is the easiest way to get started with an IRA and an excellent choice for first-time investors.
3. Tell Your Teenagers to Try Out Index Funds
Most teens love instant gratification. And learning how to invest isn’t always appeasing. So to ensure they remain engaged, allow them to have more control over their investments. While tech stocks are fascinating for many teens, index funds offer a few other benefits.
Investing in a single company causes you to feel every high and low the company experiences. So instead, encourage your teen to invest in index funds.
They’ll still get exposure to their favorite companies. They just won’t be tied to one single investment, as the experts at U.S. News discuss.
This is important. And it can make a huge difference, not only in your teen’s success but also in their attitude towards investing.
If you’re not savvy about how to diversify your stocks, that could also be an issue. Can you offer your teen advice to prevent them from dealing with significant stock problems in the future? If not, definitely consider talking to them about index funds.
I recommend putting at least half of your invested dollars in index funds. This way, your teen can feel what it’s like to invest, without all the risk.
4. Dip Their Toes in Stocks
There’s more risk investing in individual stocks than a portfolio holding index funds. But many teens love the idea of investing in their favorite companies and owning a share. But before you allow your teen to invest in a company, it’s important to talk to them about how to research stocks.
Investing gives you a heightened sense of awareness of what’s going on in the economy around you. When they have a share of a company, they’re more likely to stay on top of what’s happening. This helps your teen remain abreast of possible problems.
One problem with investing is that many favorite companies often have high-priced stocks. It’s a good idea to talk to your teenager about how they are going to save money to be able to invest in their chosen company.
This is also an excellent time to talk to them about the benefits of having money set aside in a savings account. They’ll need to think about how to use that money to buy stocks they want when they’ve done all their research.
5. Get Them to Invest in a Business
For a more exciting approach to investing, consider investing in a business. But as a parent, be careful. Make sure nobody tries to get your teen to invest in a business that is only designed to take advantage of people. This happened to me in college with a shady “t-shirt for credit card application” business.
With proper vetting, though, investing in a business can be very exciting. Whether they decide to open their own business or have researched businesses owned by family members or friends, investing in a business makes everything personal and is an excellent way for your teen to want to learn about business and investing quickly.
While I do believe failure is a great way to learn, you want to make sure your teen isn’t setting themselves up for failure by investing in a business that isn’t sustainable.
I think the cost of investing in individual businesses can be too high for some teenagers. So you as the parent need to be willing to act as the voice of reason, when necessary.
This can be difficult. But making sure your teenager is investing responsibly is essential and will allow you to help protect them before they make a huge mistake.
6. Teach them about CDs
Certificates of Deposit aren’t nearly as attractive to most teens as investing in the stock market. But they also aren’t nearly as risky. Which is why you need to encourage your teens to consider investing in CDs.
One thing that makes CDs one of the best investments for teens is that they’re FDIC insured. This will reduce a lot of the stress that cautious teens may feel about investing.
There are many different terms you can choose from when getting a CD. Also, longer terms will allow you to enjoy higher rates on your money.
This is an excellent lesson for teenagers, especially as they see how investing money for extended periods will earn them more, but taking the money out of the account will penalize them.
Since there are a few different payment options you can choose from when you open a CD, teens will be able to feel like they have a little control over their money.
And they may be more interested if they set up a CD to pay them their interest via a check or direct deposit. Of course, I think that this is a great time to explain compounding interest and its benefits, too.
7. Open a Custodial Traditional IRA
Anyone who has earned income can open a Traditional IRA. This means your teenager can fund one, even if they only have a summer job or a short part-time job during the year.
Teens can invest up to $5,500 per year in a Traditional IRA, and the money can be placed into a self-directed brokerage account. This will allow them to control their money and start investing it.
Traditional IRAs have the benefit of allowing teens to enjoy a tax deduction on the money they contribute to their account. For most teens, this isn’t much of an issue, as they probably won’t be making so much money they need to worry about meeting an income threshold. But if they earn $6,500 or more in 2018, then a Traditional IRA makes a lot of sense.
One advantage that your teen will enjoy when they open a Traditional IRA is that they provide tax-deferred accumulation of their investment earnings. This can offer lifelong benefits as their earnings compound, which is why so many teenagers can really benefit from opening this type of IRA. To make sure that you choose the right one for your teenager, you will want to check with a professional.
8.Set Up Uniform Transfers to Minors Accounts
Uniform Transfers to Minors Accounts, or UTMA accounts, are great options if you are looking to help your teenager start investing. They can be set up with a wide variety of different types of investment accounts.
This not only allows you to try out different investment options so your teen can get experience with different types of investing, but the money can be used for any purpose, including education.
These accounts are made for the benefit of a minor and have to be controlled by a custodian, who is usually the parent of the teen. When the child reaches the state’s age of majority, they can have access to the money.
The income made from investments in the account will be taxed at the child’s rate and will vary depending on their age and whether or not they are a student.
I think UTMA accounts are an excellent option for teenagers who want to start investing, as they allow them to have control in the investment process. But the parents have the final say in changes that are made in the account. UTMA accounts can be held in banks, with investment brokers, and even with mutual funds.
There are many great options for teens to get started with investing. Especially when their parents are involved and are willing to offer them the support and guidance that they need when making money decisions.
Which type of investment you choose will depend a lot not only on the amount of money your teenager has to invest, but also their risk tolerance and how involved they want to be with their investments.
What do you think are the best investments for teens, and have you helped your teenager open any type of investment account?