Investment – the word may seem complex or intimidating to many, but it isn’t. If your teenager has started earning money through summer jobs, babysitting, giving tuitions, etc., learning about investments would be fruitful for them.
Also, if your teen does not like to rely on you for their pocket money, they must be interested in understanding the basic concepts of money, how to earn it, and where to invest.
Adolescence is the right stage for your child to understand the fundamentals and benefits of investments. Thus, learn more about the types of investments for teens in this post and encourage them to invest.
When Should Teens Start Investing?
When’s the right time for teens to invest? Well, the answer is “now.” There are various options for teens to invest. However, a teen or minor will need the help of their parents.
They will need to open an account called a custodial account or joint account under the supervision of a parent. Teens cannot access the account themselves until they reach the age of 18.
Also, it is not mandatory for teens to invest a considerable amount initially. They could start with a small amount and gradually learn.
Types Of Investments For Teenagers
Here are the various types of investments that teenagers can opt for.
1. Bank account (savings)
Although having a savings account is not considered an investment, it is still a good option for teenagers to take their first step towards financial planning. A savings account doesn’t involve much risk and guarantees some return. Search for a reliable bank that offers a reasonable return rate. Through a savings account, your child can learn to save and grow their money.
2. Stock market
Teenagers are not allowed to trade or invest in the stock market. However, a teen’s parent or guardian can open a custodial account and help the child invest in their favorite companies, such as Roblox, Disney, or McDonald’s. Your child could check the potential trades with your help so that they do not end up making incorrect trades. Also, this will give them a basic understanding of how businesses function.
Bonds are loan or debt securities issued by the government, corporations, or other organizations to lenders in exchange for interest payments. Teens can invest by buying a bond from any of the sectors and get the interest when the bond matures. Bonds give you a steady return of income and are less risky than stocks.
4. Mutual funds
In this type of investment, teens can invest their money with the help of their parents or guardians. For this, they need to open a custodial account. Mutual funds are a collection of stocks, bonds, etc., that are traded and managed with the help of professional advisors who guide you and assist you in where to invest. In addition, investing in mutual funds is safer than investing in individual stocks.
5. Individual retirement account (IRA)
This is a long-term and tax-benefit retirement account in which a teen can contribute a small amount of their income each year. The only requirement to open the account is to have a job and earn an income, which your teen can do by engaging in small part-time jobs.
Saving for retirement from a young age is a wise investment strategy. So, an IRA is an excellent option for your teen to prepare for a happy retired life.
This is one of the most fun-filled and educational ways of investing for teens. Entrepreneurship has gained popularity as more teens and adults are starting their businesses and are self-employed.
This idea helps and teaches teens the basics of investing in their own businesses. They will learn how to purchase essential pieces of equipment, track expenses, and decide the prices, thus helping them gain experience in earning and managing money.
Ways To Get Your Teens To Start Investing
There are many ways through which you could help your teen invest. Read on to learn more.
1. Open a savings account for them
The safest way to let your teen invest is by opening a savings account for them. They need not have to take any risk, and it requires no knowledge about the stock market. For example, you could open a joint account in the same bank where you have an account.
Once the teenager attains the age of 18, they can access their money to pay their college fees or start a new venture.
2. Let them try out index funds
Index funds deal with investing in stocks or bonds with low fees. They have low risk and offer steady growth. Instead of investing in one company, set up an index fund in your child’s name, and let them manage it once they reach the age of 18.
3. Guide them to invest in stocks
Investing in stocks is a bit riskier than investing in index funds. However, your teen would love to invest in their favorite company and own a share of it. Thus, before they go for it, discuss and guide them on how to research stocks.
You could share websites where your teen can research the stocks, shares, and bonds held by their favorite company. By doing so, they will be aware of the company’s standing. Let them start small and get the hang of it.
4. Introduce them to CD
CD stands for certificate of deposit and is less attractive than investing in the stock market. However, unlike a stock market, CDs are low-risk, and thus, teens should be motivated to invest in them.
CDs are long-term investment options, where teens can invest for a longer period and enjoy a fixed interest for a fixed term – which could be six months, one year, five years, or even more.
Besides, CDs pay more interest as compared to a savings account and offer safe returns with consistency.
5. Open a traditional custodial IRA
A traditional IRA can be opened by anyone who has earned income. A teenager with a part-time job can open a traditional IRA and invest up to $5,500 each year.
Traditional IRAs come with several pros, including tax exemption and compounding interest.
6. Help them manage their first checking account
Opening a checking account, also called a transaction account, for teens is a great way to help them invest for the first time. The account allows them to make several withdrawals and unlimited deposits. Open one for them and let them manage a set amount of money each month.
7. Set up a 529 plan
A 529 plan, also termed a qualified tuition plan, is sponsored by the states or educational institutions.
This is also a tax-advantaged account that encourages savings for further education expenses. It can be opened at any time before a child turns 18. It allows you to pay educational expenses right from kindergarten to college, and the withdrawals are tax-exempted when used for educational purposes.
Investments may sound tricky to children under 18, but it becomes easier with the help and support of the parents or guardians. If you want your children to be independent financially, then give them a head start. Guide them to open any account mentioned in this post early on and reap the benefits for a bright future.
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