Investing for teens is a pretty modern concept, but it is catching up soon.
Increasingly you see more financially prudent teenagers today.
Gone are the days when they were only earning in summer vacations.
There are many ways that teenagers can now make money online.
Both in terms of options and extent, they are earning a lot more than their peers 10-20 years ago.
As a result, investing your earnings is no longer an adult topic.
In fact, if you start early, investing can become your primary way to earn money.
Investing for teens is not just a viable proposition, it can, in fact, enhance your adult savings.
But by this, I am not suggesting quitting your studies and concentrating on investing or earning.
The best part of investing for teens is your savings can be as low as $500.
One of my most favorite examples is the weekly pocket money you get.
Let us assume your parents pay you $10 a week.
That makes your early pocket money allowance a little more than $500.
Even if you keep aside $3-4 every week, you get approximately $200.
What if you invested the money you saved?
Do you feel this is too little an amount to invest?
Can you imagine the kind of savings this paltry amount can yield?
Even this amount is quite sufficient to set off your investment journey.
The good news is now you have a plethora of options for generating robust investment.
After all, investing for teens is more about change in thinking rather than the amount of change.
You don’t need too much money; you only need the will to invest in.
Here is a quick lowdown on how to proceed when investing for teens.
This is simple and effective.
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Set Your Investment Targets
But wait, the principal for investing for teens is same as adults.
First and foremost, you have to set your objectives and targets.
What are you expecting from your investments and how much money are you expecting in n years?
These are the key questions that set the tone and tenor for any great investment.
In many ways, that is the stepping stone which lays the foundation of all great investments.
The first step is to identify the instrument that you will like to invest in.
That necessitates another condition, the level of risk.
Broadly most available investment options can be divided into
- No Risk
- Low Risk
- Medium Risk
- High Risk
Almost inevitably the no risk and low-risk options yield much lesser returns compared to the other two.
The money that you deposit in the savings account and the certificates of deposit falls under this category.
Mutual Funds, stocks and the like fall under the medium risk category.
There is a distinctly reasonable return prospect but at the same time,
Sector-specific mutual funds are among the high-risk investment alternatives.
These include certain sectors like technology or energy and segments like midcaps or penny stocks.
These sectors typically have wild price swings and can be extremely volatile at times.
The downward spikes are often as sharp as the upward ones.
However, the relatively high returns may often convince investors to put their money in these.
This is dependent totally on the investor’s discretion.
They can choose the instrument based on the degree of risk they are comfortable with.
You have to balance the rate of relative returns with that of the rate of risk.
That is how you can decide on relatively dependable investment instruments.
Ways of Investing for Teens
You need to choose instruments that deliver satisfactory returns.
Here is the list of the 10 ways that teens can invest:
- 529 Plan
- Education Savings Account
- Certificates of Deposit
- Mutual Funds
- Retirement Plans
- Robo Advisors
- Savings Bank Account
- US Savings Bond
1. 529 Plan
This is perhaps one of the most appropriate plans when you are investing for teens.
This helps you grow funds for your expensive college education and makes you self-reliant early on.
It is a relatively moderate risk opportunity.
The stable returns and a large sum of money you can use later is a major incentive.
This uses tax-free investing options to power your college funds in a meaningful way.
Remember you can never be too late to start saving, and teenage is sometimes a lot better than adulthood.
The 529 plan is primarily aimed at college funding.
So the basics of return reward ratio stay constant.
The nitty gritty and savings methodology may, however, change from state to state.
Every state has its own signature college saving plan to ensure operational ease.
This is primarily targeted to help you with your college savings.
You can allocate these funds across a wide gamut of investment options.
These do not carry a tax liability till they are withdrawn to pay for your college.
The limits for contribution to these plans can be varied.
The upper limit is often very high.
You can also take advantage of the gift and estate tax benefits using this plan.
Opening a 529 account or an ESA is not too difficult either.
You can start putting in money bit by bit in a meaningful way.
If you use these funds only for educational expenses, the interest is tax-free.
You can start by investing as low as $25 every month.
Remember most savings instrument grow in compounded form so by the time you will start using it; you can have quite a lump sum.
As the entry limit is so small, it will never hurt to start this type of investment at any time.
2. Education Savings Account
This is another interesting academic plan that you can start investing for teens.
This is also a variation of the traditional college savings plan.
If you are looking for some savings instrument that will yield more self-directed results, this is a great one.
However, the upper limit for contributions to this plan is capped at $2000 every year.
But that does not mean it is not a viable plan.
Especially, if you are looking for an investment instrument that is not covered by 529 Plan, this is an alternative.
Moreover, when you are investing for teens, even if the quantum of your investment small, it can still generate great returns.
This is primarily another means to create additional savings for a rainy day.
3. Certificates of Deposit
Whether you are investing for teens or adults, this is by far one of the most popular options.
A certificate of deposit is undeniably a low-risk opportunity but at the same time yields reasonable returns.
You can redeem it at any time you need in return of some pre-payment charges.
These are also insured by the Government, this brings down the risk even more.
They also have a relatively higher rate of return amongst other Government products.
So it becomes a very convenient option for passive income.
You have the option to decide on the amount and the duration that you want the investment for.
It can start as little as $100, and the outer limit can be any amount.
You can get these for a variety of duration starting from 1 year to even five years.
Normally the one with the longest duration yields the highest rate.
In case, you need to liquidate the money earlier; you can still do so after a penalty payment.
4. Mutual Funds
When you are investing for teens, the relative risk-return ratio is crucial.
This is why Index Mutual Funds can be an effective option when you are planning to invest in Mutual Funds for teenagers.
Traditionally, the Index will inevitably yield much higher returns over any time period.
The relative risk in these is also much lesser.
Moreover, you can choose Mutual Funds for any duration that you like.
Normally they have a pre-decided lock-in period.
You can also reinvest the interest into further funds.
The minimum amount can be quite small.
You can also invest in systematic investment plans for Mutual Funds.
These need you to invest regularly, but at the same time, it does not have to be too large.
So that way it works out to be a convenient option for teenagers and adults to invest some cash regularly.
It is for the same reason that I will suggest even ETFs when you are investing for teens.
ETFs are exchange traded funds that derive their value from the underlying Index or commodity.
Though the underlying value is derived from the Index, there is no direct exposure to these assets.
The advantage over Mutual Funds is that it requires a lower amount to start off your investments.
While you can redeem Mutual Funds only at the end of a trading day, this is a pretty flexible plan.
You can redeem these pretty much like stocks at any time you want.
Though these are medium risk options as they deal with market products, there is a low risk of your assets depreciating below the principal.
The Index or commodities are the most popular ETF opportunities.
These are also among the very resilient asset classes
6. Retirement Plans
Whether you are investing for teens or young adults, it is never too early to start your retirement plans.
Saving for retirement is a necessity, and the earlier you start, the better.
The law of compounding will only ensure that you go smiling to the bank.
The IRA or the individual retirement account is one of the most common propositions.
When you start saving for your retirement early, it also means that you can retire earlier.
There are many types of IRA that you may look at.
However, the traditional IRA or the Roth IRA is amongst the most popular.
These will offer maximum benefit to individuals in the lower tax bracket.
Needless to mention that teenagers do fall into this category.
So it comes across as a viable option when investing for teens.
You are not just helping them invest their money but also securing their future.
The fund that gets accumulated can form the basis of bigger and better investments going forward.
When you are planning investing for teens, you can also look at stocks.
But this is mainly for teenagers bordering on adulthood.
Financial literacy is relatively higher in the current scenario.
As a result, more and more investors are open to investing in stocks.
But as I mentioned earlier, the risk and return balance is crucial when you are investing for teens.
You have to carefully curate the investment opportunities.
The idea will always be about maximizing returns and reducing risk as much as possible.
So you can look at investing in the Index or stable blue chips.
But remember these are specifically investments for the longer term.
Short-term or intra-day trades are only market veterans.
It is never worthwhile to drag teenage investments into that kind of a volatile situation.
Look for stable and sound businesses that can offer relatively better value going forward.
8. Robo Advisors
The reason why I suggested stocks as an option for investing for teens is also because of the technological advances.
The Robo Advisors have completely changed the entire game plan in the world of financial investment.
They use a whole gamut of technological advances to ensure that the investor’s money is in safe hands.
Moreover, these automated investment platforms like Betterment are also programmed for capital preservation.
These are also low-cost investment avenues.
Most robo advisors have 0 or a nominal trading charge.
The accounts see auto-rebalancing depending on the way the markets are moving.
For your teenage investor, this is a double benefit.
The money is invested and at the same time, it does not face any undue risk.
When you are planning to make yearly savings of less than $500, this is also a very convenient opportunity.
It provides a brilliant opportunity to diversify your savings.
But at the same time, the investor can play a fairly passive role in it.
You just have to fund your account at regular intervals.
Most times, the robo advisors are fairly competent in tackling most of the other related programs.
9. Savings Bank Account
Suppose you are unsure about all the above options.
You can still look at investing for teens in a conventional savings bank account.
While the rate of return may not be as high as most of the other instruments we suggested, this is a 0 risk opportunity.
It is ultimately one such savings instruments that just do not have a pre-condition attached.
Whatever little amount of money you earn as an interest, it is unconditionally yours.
It is not going to go anywhere.
So when you are investing for teens, this is undeniably the first step.
Instead of stacking up the money in the corner cupboard or envelopes, it is always a great idea to make it work.
A savings bank account is perhaps the first step in the right direction for it.
Most times, parents use the savings bank as the first step towards more meaningful savings going forward.
It can also help teenagers to get into the savings habit.
They become conversant with the financial process when they start banking regularly.
This awareness about the money thus created can also help in them becoming financially competent later in life.
This will also make sure that the cash is not spent before you can create other investment channels using it.
10. US Savings Bond
Last but not the least, the US Savings bond is a convenient opportunity while investing for teens.
This is also known as safe haven investment for the relative security that they offer.
In fact, this is amongst the safest investment bets available at the moment.
Your money can’t be safer in any other medium.
But at the same time, you have to make do with really small returns.
But given the kind of protection they offer, you have to be prepared to accept the lower rate of return.
Therefore investing for teens is primarily about recalibration of investment objectives.
It is never important to calculate how much you are investing.
Rather the focus is more on how well you are doing so.
Remember most times the amount you are investing is very little when you are investing for teens.
So I have shortlisted opportunities with lower processing fees.
Otherwise, most of the profit will get eroded in paying for processing charges and taxes.
Typically the tax liability of teenagers is also much limited.
Therefore the primary focus is to go for high return options.
But at the same time, one has to be mindful of the risk involved.
Only when the balance between the two is effective, you can narrow down suitable options for investing for teens.