Teenagers looking to get a head start in the financial world should start investing. Investing is putting funds into assets with the hope of profitable returns. It is essentially putting your money to work.
Investing is especially important for teenagers as it allows them time to let their investments accumulate and grow. Most wait until they are adults to start. While this is an acceptable approach, starting as a teenager can get you far ahead. To further assure you, let’s look at some numbers.
If you start investing at age 15 with an initial $100 investment and contribute $50 each month until you retire (expected retirement is at age 65), then you will come out with $880,752 (with the average annual return of 10%).
On the other hand, if you start investing at age 22 with an initial $100 investment and contribute $50 each month until you retire, then you’ll come out with $435,627. By waiting an extra 7 years, the end result was less than half of the amount you would get if you started investing earlier. This is the power of starting investing at a young age.
Investing may be confusing to get into and start. Thankfully, in this article we will be discussing how teenagers can start investing and the benefits that follow.
Why Should Teenagers Start Investing Now?
According to Fidelity Investments, only 1 in 5 teenagers have started investing. This is 80% too little. Those who start at an early age compared to waiting years to begin reap numerous benefits and an advantage over their peers, in both their potential returns and knowledge gained.
They Set Themselves Up For Success
When teenagers start investing at a young age, they are building a strong foundation for their financial future. By indulging yourself in the world of finance at a young age you are opening your mind to new opportunities and possibilities. The main advantage of young investors compared to older, more experienced investors is time, which transitions us into my next point. Let’s talk about the wonders of compound interest.
Compound Interest
Compound interest is defined simply as the interest achieved by the initial investment as well as the interest you have accumulated over time. Let’s explain it in a simpler fashion. If you invest $100 with a 5% interest rate each year, then you’ll have $105 at the end of the year. The next year you will have $110.25. That’s an additional 25 cents, or 5% extra on the interest that you initially had. This may not sound like much, but with higher amounts and additional time it adds up. This is the backbone of long-term investing.
When investors start early, they allow their money more time to grow and accumulate. Teenagers can harness the potential of their investments to accumulate wealth by striking early. Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
They Learn Valuable Financial Lessons
Early exposure to the financial world can cultivate a strong foundation in financial literacy. Financial literacy is the ability to understand and utilize various financial skills. In addition to this, teenagers also begin to understand the volatility and patterns of markets, the importance of making informed decisions, as well as risk management.
Because of their youth, teenagers can take more (calculated) risks. They can learn about risk management and both the highs and the lows. The riskier the investment, the higher the potential returns are. This also means the higher the potential losses are. Teenagers can dabble in both safe and risky investments to learn about the emotions and returns that follow.
Investing builds numerous skills that are crucial to life. These include self-discipline, adaptability, patience, a long-term vision, and fostering a proactive mindset. These skills help them to navigate the economic landscape.
How To Start Investing As A Teenager
Some may think that investing is off-limits for teenagers. However, this is simply not the case. There are no age requirements for investing, unless you are considering opening your own account under the age of 18.
Investing can seem confusing at first. This can definitely be the case if you decide to jump head-first into the investing world. But if you take the time to educate yourself and set goals, then you can enter the space with a clear head and make informed decisions. It is recommended that you learn about the different types of investments first. This can include, but is not limited to:
- Individual Stocks
- Funds
- Bonds
- Certificates of Deposit (CDs)
- High-Yield Savings Accounts
It is just as important to set goals when investing. Goals give direction and purpose. They act as a measurement of progress, allowing investors to track their advancements and make necessary adjustments along the way. Additionally, goals act as motivation, giving people a reason to pursue investing.
Custodial Accounts
While it is true that you can not start investing until age 18, it is also true that there are workarounds that allow you to start investing at an earlier age. The first and most popular method is to open a custodial account.
A custodial account is an account that is set up and administered by an adult meant for minors. When the child reaches adulthood (this can be either 18 or 21 depending on the state), they’ll gain full access to the account. The assets in the account legally belong to the minor, with the adult acting as a placeholder until the minor becomes of age.
Mock Accounts
A virtual trading account (also known as a paper trading account) is an investment account that does not use real funds, and instead uses fake/virtual money to simulate investing. The best part is that it is completely risk-free! Mock accounts are a great way to practice investing and take a stab at the market without taking the risk of investing your own money. Also, it teaches you how to take emotions out of investing.
Make Sure You Are Ready To Start
Before you start investing, make sure you are prepared. Do you know what you’re getting into and understand the world of investing? Do you acknowledge the potential risks? With the money you invest, make sure that you can afford to lose the money if the investment didn’t go as planned and that you won’t need immediate access to it. Assuming that you are under 18, make sure you have a collaborator that is willing to help you with investing. With this in mind, you are ready to start!
Thank you for viewing this post! If you enjoyed it, check out our other posts.
