Investing

Introducting Investing to Teens

Teaching your teens how to invest their money will yield tremendous dividends in financial literacy that will benefit them for life!

Teens possess one of investing’s most valuable assets: time. Teaching them about investing at an early age helps set them up for a lifetime of financial success. 

Here are key investing concepts you should teach your teen, plus tips to make the lessons engaging and relatable.

Set Long-Range Goals

First, start by explaining how investing is a long-term process. Because they’ve started investing early in life, teens can ride out any market downturns. After all, while the stock market will go up and down, returns average 9.2% for every ten years over the past 140 years.

Help your teen understand the difference between long and short-term goals. For example, investing is unlikely to earn enough for them to buy a car in a few years. However, investments today might help them buy a house 10, 15 or 20 years in the future.

The Power of Compound Returns

Explain the concept of compound interest, which is the interest you earn on interest. At first, compound interest might not seem like much. For instance, a $100 investment with a 5% interest rate only earns $5 the first year. However, it adds up over time, resulting in a significant amount of money by the time the teen reaches adulthood.

A related concept you’ll also want to explain is the Rule of 72. It’s a simple math formula that tells you how long until your investment doubles.

Divide 72 by the interest rate. For example, if the interest rate is 7%, you divide 72 by 7 to get 10.28, which is the number of years when your investment is worth twice as much as what you originally put in.

Invest in Companies They Know

When developing an investment portfolio as an adult, you’ll likely want to favor steadier index funds over the potential volatility of picking individual stocks. But buying a single stock is often a great teaching tool for teens.

Encourage them to pick a stock in a company they’re familiar with. For example:

  • If they like Marvel movies, they might want to buy a small amount of Disney stock.
  • If they like cars, they could invest in their favorite auto manufacturer.

The point isn’t to necessarily make money. Instead, buying stock in a company they understand helps reinforce the connection between the stock and the real world. Plus, it helps emphasize that, as a stock owner, they’re now a part-owner of the company.

Turn Investing into a Habit

Whenever your teen receives money, encourage them to invest a small portion. If they grow up developing this habit, they’re more likely to continue with it into adulthood.

Note that investing is different from saving. You’ll want to encourage kids to do both. Their savings account is a way to build up towards a short-term goal, like a car or college. Investing, at least for the moment, is a way to build wealth, but also a teaching tool.  

Use a Custodial Account

Teenagers are too young to open their own investment accounts. Instead, they commonly invest through a custodial brokerage account. It allows a parent or other legal guardian to open an account in the teen’s name. The adult acts as custodian of the account until the teen turns 18 or 21, depending on your state’s laws.  

You can open a custodial brokerage account with only $100. They’re an excellent option if you’re investing a small amount of money. However, if you’re investing tens of thousands of dollars or more, taxes can get somewhat complicated later on.

Final Thoughts

Teens struggle with concepts related to long-term goals, so when introducing investing concepts, it’s important to meet them where they are. Let them pick a stock related to their interests and encourage them to track its performance. 

Also, start with small, consistent actions, such as automatically investing a portion of anything earned.

Teaching your teens how to invest their money will yield tremendous dividends in financial literacy that will benefit them for life!

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