While it doesn’t hurt to discuss investing with children at an earlier age, they can get real, hands-on experience with investing as a teenager. Like many other kids in the 1980s, I played the Stock Market Game in elementary school, and learned nothing about investing, but I learned that adults checked the newspaper every day and would fret over IBM being down an eighth. It wasn’t a great introduction to long-term investing; in fact, it was no introduction.
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One private high school thinks it’s doing the right thing by giving its teenage students $100,000 to play the Stock Market Game using real money from other people, preparation for a life in a potentially lucrative career in money management, and if your annual earnings are in the mid-six figures, saving for the future is technically easy, even while living a flagrant lifestyle. That’s not a great way for middle-class or socio-economically-challenged teenagers to learn about managing their own money.
You don’t learn much about managing money if the money you’re managing isn’t scarce. There’s no scarcity when a private school raises $100,000 for you to play with.
And that’s why parents are often so keen on having their children begin working to earn money on their own. This is an important piece of experience to gain at a formative age, though I still believe that education is the most important goal for a teenager, and work should only be pursued to the extent that it doesn’t interfere with education. (Unfortunately, the realities of poverty reduce the importance of education in favor of earning money for the household, but otherwise, the priority of education over occupation as a teenager should hold true.) There are breaks from school that provide excellent opportunities for different types of work, and if any certain teenager shows no inclination towards extracurricular school activities, a job after school is a good alternative.
On my first day on the job at my first job during high school, I learned what others might consider an obvious lesson. After being hired, I was to start my first day at Radio Shack in central New Jersey with an orientation with a regional supervisor. I showed up in jeans in a tee-shirt and the manager sent me home. I should have known that there was some kind of expectation to wear something nicer, like slacks and a button-down shirt, but for some reason I didn’t make the connection. So I came back the next day with a better understanding of expectations for my appearance.
Today, I work from home in comfortable clothing, so after twenty years, I ended up getting my way. But the point is that working as a teenager can provide experiences and knowledge that help later in life when it comes to assimilation into a career culture.
One of those lessons is what to do with money you earn from that first job. I saved some of it, but I didn’t do what I should have done — invested a portion that wouldn’t be touched for years. I did save some that ended up helping me pay for college, but it was a small amount; I probably would have been better investing it for the longer term.
For hands-on experience dealing with money, parents can help their teenagers set up a variety of financial accounts. The variety is good. If someone has $2,000 to invest, it would be worthwhile to spread it around to various types of investments or savings vehicles.
1. A Roth IRA. Every teenager with a job should start a Roth IRA. You invest in a Roth IRA with after-tax income, and because it’s likely your marginal tax rate will never be as low as it is as a teenager earning income from a part-time job, a Roth IRA is a perfect vehicle for investing. the minimum investment to open a Roth IRA at Vanguard is $1,000 and at Fidelity is $2,500, so until income reaches that point, a high-yield savings account is a good choice.
Sometimes, you can get around the minimum by committing to a monthly automatic transfer from a savings or checking account, so this second choice might come in handy.
2. Savings and checking accounts. Some online banks offer higher interest rates than traditional brick-and-mortar banks, but with the money a teenager is earning from a part-time job, the purpose may not be growth but be learning the basic financial skills of using a savings and checking account. Getting an account in the teenager’s name is possible, but most likely, this would be an account co-signed by a parent.
3. An index mutual fund. Once the teenager has saved enough money to open a Roth IRA with a minimum investment, the teenager has to choose the investment. A Roth IRA isn’t an investment in itself, it’s an account for holding investments. An index mutual fund is a great first choice — and a portfolio comprised completely of index mutual funds is a good idea for adults, too. Index mutual funds are low-cost and do not attempt to beat the market — an expensive endeavor that has never been shown to work over moderate lengths of time.
In a recent article on CNN Money, a financial expert recommended a specific fund, Vanguard Star, to teenage investors. It’s fund that combines bonds and stocks — two investment types that teenagers should learn about to understand their purposes and differences. I tend to want to go with the Vanguard Total Stock Market index fund all the way, particularly if this is an investment that will remain untouched for many years — and that’s the purpose of teaching a teenager about investing.
4. Investing in a business. If the teenager has anything left over after the above goals, and after any spending needs that he or she might have, one interesting approach would be to give the teenager an opportunity to invest directly in a business. Unfortunately, this process creates an opportunity to take advantage of the young and impressionable.
Over the years, I’ve heard many cases where parents borrow money from their children to start a business destined to fail. You wouldn’t think that teenagers would have a hard time saying no to their parents, given the rebellious nature of adolescence. But when a parent appears to be in need, even the most angsty teens, if they’re in a position to help, want to trust their parents and reduce their struggling.
Asking a teenager to invest in a business is a dangerous proposal. It’s true that failure can teach a lesson as strong or even stronger than success, but the cost from a relationship perspective can be too high. So in order to give teenagers the experience of investing directly in a business, it might be a good idea to provide that teenager an opportunity to invest in their own business. The taste of entrepreneurship doesn’t isn’t good for every teenager, but they might only find out if running a business suits them if given the opportunity.
The plan with this option is to take some of the money earned from that part-time job during school or over school breaks and use a portion of the funds to set up some kind of business that aligns with the teenager’s passions and interests. If the teenager is interested in mowing neighbors’ lawns for money, have him invest in his own equipment. If she wants to house-sit, she should consider doing more than just offering services to friends and family. Invest in advertising and perhaps form a local organization that can dispatch anyone from a team of sitters.
What kinds of investments should teenagers make with the money they earn from jobs while in school?