Learning how to invest as a teenager can set you up for a lifetime of financial success. With the power of investing, you can take control of your future now.
Luckily, it is completely possible to start investing as a teen. Once you learn the rules of investing as a teen, you’ll be on your way to a bright financial future.
In This Article
- Why Should You Start Investing As A Teen?
- Is It Possible To Invest As A Teen?
- 6 Ways to Invest As a Teen
Why Should You Start Investing As A Teen?
Before we dive into the details, it is important to understand why you should even want to do this in the first place.
There are two big reasons why you should start investing as a teen. First of all, learning how to invest now can lead to a more stable financial future. You’ll be better prepared to manage your money effectively.
Secondly, the earlier you can start investing can help you harness the full potential of compounding. With a long investment horizon on your side, you’ll be able to build your investments with the power of compounding over time.
You have everything to gain by starting your investment journey as a teenager.
Is It Possible To Invest As A Teen?
Yes, it is entirely possible to invest as a teen. Although there are some roadblocks in your way due to your age, teenagers can absolutely start investing.
Typically, your best option is to invest through a custodial account. Let’s take a closer look below.
What is a Custodial Account?
A parent or guardian can open a custodial account for you. Once the account is open, your parent or guardian can ‘gift’ funds to you. At that point, you will be able to start investing money.
With a custodial account, your parents maintain control of the management of the account. But you can still be a part of the investment process.
What Custodial Account is Right For You?
As you explore your custodial account options, you’ll find several types that you could open. But which custodial account is right for you?
Uniform Transfers to Minors Act (UTMA) account
A UTMA account can hold almost any type of investment asset, including real estate, artwork, intellectual property and stocks.
Uniform Gift to Minors Act (UGMA) account
A UGMA account can hold more limited financial assets, including cash, stocks, bonds, mutual funds and annuities.
Unlike the two options above, a custodial IRA is opened by the parent of a minor with earned income of the minor instead of a gift from the parent. Custodial IRAs can be either traditional or Roth IRAs.
As you explore your options, talk to your parents about which account best suits your financial situation. If you are intending to invest your earned income in an account, then a custodial IRA could be the right choice.
If your parents intend to provide your initial investment funds as a gift, then a UTMA or UGMA account could be a better fit.
When Will You Have Full Access?
Once you open a custodial account with the help of a parent or guardian, they will maintain control of the account. When you reach the age of majority in your state at either 18 or 21, the account will transition into your name only.
Although you may not have full access to the account for several years, it is still a good place to gain experience as an investor.
Taxes on Investments as a Teen
As you start your journey as an investor, don’t forget about taxes! Unfortunately, taxes and fees will cut into your earnings. Make sure to consider this ahead of time.
The good news is that you will likely find yourself in a lower tax bracket than your parents. With that, your tax burden may not be too high.
6 Ways to Invest As a Teen
Now that you know more about the types of accounts you can invest through, it is time to learn how to invest as a teen. Here’s what you need to know.
1. Use a High-Yield Savings Account
When you consider your investment goals, think about your investment timeline. Are you planning to use these funds in the near future? Or are you planning to let this money grow for several decades?
If you want to use these funds to pay for a big expense, like college or a car, then you should choose a less volatile investment vehicle. With that, a high yield savings account could be a good option.
Although a high yield savings account will not have the most lucrative earning potential, it is a relatively safe place to grow your funds.
2. Invest in Stocks
As you get started with the stock market, individual stocks are an easy place to start. Researching individual stocks will help you learn a lot about the market. As you start to invest in individual stocks, you’ll learn more about how the market works.
You can get started by purchasing stocks that are interesting to you through your custodial account. It can be an exciting day when you become a stockholder in a company you care about like Disney or Target.
Although individual stocks can present more risk, it is a great way to learn the ropes of building an investment portfolio.
3. Invest in Index Funds and ETFs
After you gain a better understanding of stocks through individual investments, it can be a good idea to consider index funds and ETFs.
An index fund will allow you to invest in a large number of companies through a single investment. With that, you can build a more diverse investment portfolio.
Typically, investors choose index funds when building a portfolio with a long-term investing mindset. Consider why you are investing through your custodial account. If you want to build long-term wealth, then an index fund can be the perfect opportunity.
4. Use a Micro-Savings App
A micro-savings app can allow you to build your investment portfolio over time with small additions to your portfolio. With a micro-savings app, essentially any purchase you make will lead to a deposit in your investment account.
Every time you make a purchase, the app will round up to the nearest dollar and tuck the difference away in your investment account. For example, let’s say you buy a movie ticket for $14.50.
The micro-savings app will round up your purchase to the nearest dollar and invest 50 cents for you automatically.
A few of the best micro-savings app include:
With the help of an Acorns Family account, you can build your savings in a custodial account. You can learn more about Acorns in our full review.
Stash allows you to open a custodial account for minors. With that, you can use this micro-savings app to your advantage.
FamZoo helps you and your parents manage your money together. It can be a great start to investing together.
Stockpile allows you and your parents to work together while building your portfolio.
Although these savings might seem small at first, they can add up quickly.
5. Invest in Yourself
Beyond investing in the traditional sense, it can be a great time to invest in yourself. Whether you spend extra money to prioritize your health or learn a new skill, investing in yourself is never a bad idea.
6. Start Your Own Small Business
Do you have a business idea? Why not invest any extra money you have into getting your small business off the ground.
Investing as a teenager can allow you to build a stable financial future. The decision to invest your money now is an excellent start to a lifelong financial journey.
As you learn how to invest as a teen, let us know how you got started in the comments!