Early Experiences Can Significantly Impact a Young Person’s Financial Future
Have you ever wondered how much money you would have now if you had started investing as a teenager? The answer is probably considerably more than what you currently have! Just thinking of what compound interest could have done for you with all those added years can drive you a little bit crazy, but instead of playing the “what if” game and focusing on regrets, why not channel your energy into teaching your own kids how to invest early and often?
If you want to raise savvy investors who will be prepared to build wealth and financial security as adults, teaching your kids foundational skills on how to invest is important. Below, we’ll discuss investing for teens, including five ways you can get your teenaged kids started down this path without exposing them to too much risk.
1. Make Sure Your Teen Has Their Own Checking Account
Helping your teenager open a checking account might not seem like it has anything to do with investing, but it’s a great way for them to learn foundation personal finance lessons that will enable them to become smart investors. They need to get comfortable with the idea of regularly putting money into an account, with the financial responsibility of using a debit card, and with the skills needed to manage their balance.
Of course, you’ll want to look for a bank with as few fees as possible. Some even offer daily transaction limits on withdrawals or debit card purchases – a nice feature for parents. In fact, some financial institutions even offer joint checking accounts designed for teenagers to learn and gain financial freedom, but under the guidance of a parent or guardian.
2. Help Your Teen Open a Savings Account
Don’t dismiss the efficacy of teaching your kids about utilizing a savings account. If you think about it, it’s actually a smart way to prepare them for investing, but without the stress of researching stocks or the risk of losing their money. They put money in, they exercise patience as they watch it grow a bit over time, and – if you encourage them to use an online savings account – they can’t easily withdraw the money or make impulse purchases either. Having your money in a place where you can’t easily access it at the moment is a lot like having it invested in stocks or bonds. The added benefit here is that, once they are truly ready to invest, they’ll find that many companies require a minimum to invest, at which point they can utilize the money they’ve saved.
3. Get Working Teens Started with a Roth IRA
If your teenager has a job, they can begin investing some after-tax income into a Roth IRA. Since they likely have a very low tax rate, this is a great vehicle for investing and saving money that won’t be subject to taxes when they withdraw it in the future. There are typically minimum investment amounts required to open a Roth IRA, so you’ll need to find the right option. (Some are as low as $1,000.) Help them invest in a mutual fund and let them watch the natural cycles of the markets over time. They’ll likely see their balances go up and down and gain comfort with the idea of playing the long game.
4. Let Teens Try Out Index Funds
Okay, so the idea of playing the long game may not be particularly appealing to teenagers, right? They’re more used to instant gratification. So, if you want to keep them engaged in the investing process, give them an option that allows them to have more control over their investments. They might be fascinated by tech stocks like Apple, but that doesn’t mean they’re mentally prepared to weather every high and low the company experiences. That’s what makes index funds a better option at this age. They can still gain exposure to their favorite big-name companies, but without the risk – or emotional rollercoaster – of a single investment.
5. Make Sure They Understand CDs
So, let’s say you have a teen who is a bit risk-averse, or who doesn’t feel comfortable with the idea of investing in the stock market just yet. They can still learn valuable lessons and gain experience by investing in a certificate of deposit (CD), plus gain a level of comfort once you explain that they are FDIC insured. Since CDs offer various terms, your teen can also get first-hand experience learning how investing money for longer periods of time will earn more, while taking money out will penalize them.
The Bottom Line? Early Experiences Matter
Regardless of which options you utilize for your teenagers – and the above is not an exhaustive list – the knowledge and experience they gain will be important in the long run. Early exposure to foundational financial principles and to investing will make them savvier with their money as adults.
Got a teenager who is really showing an interest in investing? Introduce them to our Money Wise podcast! All episodes are available on the Davidson Capital Management website, or on your favorite podcast provider.