Investment, at its core, is putting your money into something with the hope of a financial return, and it is one of the best ways to build wealth and achieve your financial goals, from retirement to your dream home. While most people start investing as adults, investing as a teenager can give you an early start in saving for the future and learning vital financial lessons.
Why You Should Help Your Teen Start Investing Early
Individuals who begin investing as teenagers rather than waiting until later in life have an advantage over their peers, whether in potential returns or knowledge they can gain from investing.
“Time is the most valuable asset for a younger investor. This is due to compound interest, or your ability to have your money start earning money on its own,” said Taylor Gessie, a certified public accountant and certified financial planner, and director of financial planning at Taylor Hoffman Financial. “The earlier you start investing, the more time you have to make your money work for you.”
Let’s take a look at an example. Imagine that a 15-year-old starts investing $150 a month in a brokerage account with an annual return of 10%. If they invest $150 a month until age 60, with compound interest, they would have over $1.3 million in savings. On the other hand, someone who started investing the same amount at age 35 would have less than $180,000 by age 60.
What your teen earns in an investment account can help them pay for college, buy a home, start a family, travel the world, start a business, and more.
Investing as a teenager helps young people financially prepare for the future. It also helps them gain important financial literacy skills. For many, personal finance is a source of stress and anxiety. A 2018 study by the National Financial Capability Study from the Financial Industry Regulatory Authority (FINRA) found that 53% of Americans consider their finances a source of stress, with respondents aged 18 to 34 reporting the highest stress levels. By helping your teen build their financial literacy from an early age, you may help them feel confident and secure about financial matters later on.
What Teenagers Should Invest In
With so many investment options available, which carry varying levels of risk, it can be challenging to know where to start investing. Here are some common investments available to teens and a few drawbacks to be aware of.
High-Yield Savings Accounts
A high-yield savings account (HYSA) is the simplest way for a teenager to start earning a return on their money. Savings accounts have been around for a long time, but now financial institutions offer more high-yield savings accounts, which provide a higher interest rate than a standard account. With a higher interest rate, your money will grow more than it would in a traditional savings account. However, even high-yield savings accounts have very low return rates compared to other investments.
Note: There is no risk in putting your money in an HYSA. Funds are insured up to $250,000 by the Federal Deposit Insurance Corporation.
Certificates of Deposit
A certificate of deposit (CD) is a banking product similar to a savings account where a teenager can earn interest on their savings. The key difference is that CDs require you to keep your money in the account for a specific number of months (or even years) to earn the promised interest rate. Then, when you redeem the CD at maturity, you will receive your money back along with the interest your account earned.
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Savings accounts are considered a low-risk investment because the money is insured by the Federal Deposit Insurance Corporation up to $250,000. However, the downside is that your money is essentially locked away for a period of time.
Stocks
A stock is a way to own a piece of what’s known as “equity” in a publicly traded company. When you own a share, you become a shareholder and a partial owner of the company. Investors can make money from dividends paid by companies to their shareholders and also through the increase in the stock’s value.
“You can take a small part of your portfolio and choose one or two stocks as a way to learn how to track and evaluate individual stocks,” said Jesse. “Think about choosing two companies you already know, so it’s easier to track and manage.”
Note: For parents and guardians, Jesse recommends adding stocks to your child’s portfolio as a supplement to diversified investments rather than building a portfolio entirely made up of individual stocks. Stocks tend to be volatile assets, meaning they can experience significant price changes over a short period of time. Before adding stocks to your teenager’s portfolio, you can work together to open a virtual trading account – also known as “paper trading” – where you can practice buying and selling stocks without using real money. Virtual trading can give your teenager an idea of how the stock market works without
Source: https://www.thebalancemoney.com/investing-guide-for-teens-and-parents-4588018
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