It’s never too early to start investing. In fact, we wish high school students invested even a little. So here are some tips on how to invest as a teenager.
It doesn’t hurt to start talking to even young kids about investing. But when they’re teenagers, the can–and should–get hands-on experience.
Like many other kids in the 1980s, I played the Stock Market Game in elementary school. I learned nothing about investing, but I learned that adults checked the newspaper every day and worried over IBM being down an eighth. It wasn’t a great introduction to long-term investing. In fact, it was no introduction at all.
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. They say it’s 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. But 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.
So what’s a parent or educator to do? I’ve got some ideas.
Earning Their Own Money
Parents with an eye on their children’s financial future often want them to start working early. Then, they can earn money on their own. Work, in and of itself, is an important experience to gain.
Of course, education is the most important work for any teenager. So they should only work as long as it doesn’t interfere with their education. (Unfortunately, the realities of poverty may favor earning money for the household over doing well in school. But whenever possible, parents should prioritize teens’ education over money-earning work.)
Even still, school breaks provide excellent opportunities for different types of work. And if a teenager shows no inclination towards extracurricular 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–invest a portion that I wouldn’t touch for years. Some of it ended up helping me pay for college, but it was a small amount. I probably would have been better off investing it for the longer term.
Learning to Invest
For hands-on experience dealing with money, parents can help their teenagers set up a variety of financial accounts. Here are the best options to consider:
1. A Roth IRA.
Every teenager with a job should start a Roth IRA. You invest in a Roth IRA with after-tax income. Because teenages’ marginal tax rate will never be as low as it is while flipping burgers part time, 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 the teenager has saved that much, socking money into a high-yield savings account is a good choice.
Some accounts waive the minimum opening amount when you set up a monthly automatic transfer from a savings or checking account. Check for this option, where possible.
The best place to open a Roth IRA for a teen, in my opinion, is Betterment. It’s very easy to use. You can start with as little as $25. And it’s a great way to learn how to invest.
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, interest rates aren’t a huge concern. The purpose of these accounts isn’t to earn interest, but to help the teenager learn basic financial skills. It’s possible to get an account in the teenager’s name. But most banks will have the parent or guardian co-sign on the account, just in case.
3. An index mutual fund
Once the teenager has saved enough money to open a Roth IRA with a minimum investment, he or she can 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, for teenaged investors. It combines bonds and stocks–two investment types that teenagers should learn about to understand their purposes and differences. I recommend going all in with the Vanguard Total Stock Market index fund. This is especially true if the investment will remain untouched for many years. And that’s always the goal of teaching a teenager about investing.
4. Investing in a business
If the teenager has any money left over after meeting the above goals and spending on any wants or needs, one interesting approach is giving him or her the opportunity to invest directly in a business. But be careful here. Such direct investments are a way for people to take advantage of young, impressionable teenagers.
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 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 want to help their parents.
Investing in a business directly is always a dangerous option. It’s true that failure can teach a strong lesson. But the cost can also be high, especially if the business is owned by a parent or someone else the teenager is close to.
So the best option here might be allowing the teenager to invest directly in a business opportunity of their own. Not every teenager will want to run their own business long-term. But giving them the opportunity to try it can he helpful.
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 a 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.
In this way, teenagers can leverage their own expertise to make more money. Then, they can continue investing some back into their growing business while putting the rest into the goals named above.
What kinds of investments should teenagers make with the money they earn from jobs while in school?
This article was originally published in 2013. The Consumerism Commentary editorial team thorougly updated it on October 23, 2017.
Updated March 14, 2018 and originally published October 23, 2017.