Investing 101 for Teens: How To Get Started?
When you invest early, you give yourself a head start on building wealth for the future.
When you're a teenager, it can be tough to think about the future. You're probably worried about school, your social life, and what you're going to do when you finish high school. But one thing you should start thinking about is how to start investing your money. When you invest early, you give yourself a head start on building wealth for the future.
Before we get into how to invest as a teen, let's first review what investing is. Investing is putting your money into something with the expectation of earning a return on your investment. This can be done in many different ways, but some popular examples include stocks, bonds, and real estate.
There are a few things to keep in mind when you're thinking about investing as a teen. First, it's important to understand that investing is different from saving. When you save money, you're typically putting it into a savings account with the intention of keeping it there for a short period of time. On the other hand, when you invest money, you're expecting to earn a return on your investment over a longer period of time.
In the short term, it's a good idea to build up your "rainy day" cash savings so you have money set aside for unexpected expenses. But once you have a solid emergency fund in place, you can start thinking about investing for the future.
Why is investing early better than investing later?
When you invest early in your life, you have a major advantage over people who start investing later. That’s because of the power of compound interest.
Compound interest is when you earn interest on your investment, and then you reinvest that money and earn interest on both the original investment and the reinvested earnings. This can help your money grow much faster than if you simply invest once and don’t reinvest the earnings.
For example, let’s say you invest $1,000 into the stock market with a 10% annual return. After 1 year, you’ll have $1,100. You reinvest that $1,100 and earn 10% on the reinvested amount, too. Now you have $1,210. So your money has grown by 21% in just 2 years.
Now, let's say you take out the profit earned every year. In that case, you would only have $1,100 after 2 years. That’s a difference of $110 simply by reinvesting your earnings!
The difference is that you’re compounding your money, or earning interest on your earnings. This can help your money grow much faster than if you invest once and don’t reinvest the earnings.
That's the power of compound interest. And the earlier you start investing, the more time your money has to grow.
Say you invest $1,000 per year starting at age 15. If you continue investing until age 60 and earn a 7% return, you’ll have almost $1 million. But if you wait until age 30 to start investing, you’ll need to invest $2,100 per year to end up with the same $1 million by age 60.
So starting early can have a major impact on the amount of money you’ll have when you are much older.
Another reason to start investing early is that you have a longer time horizon to take on more risk. When you’re young, you can afford to invest in riskier investments because you have time to ride out the ups and downs of the market. For example, let’s say you invest in a stock that loses 50% of its value in one year. If you’re retired and need to sell that stock to pay your bills, that loss can be devastating.
But if you’re 25 years old and invest in the same stock, you have plenty of time to wait for it to recover. In fact, history shows us that the stock market always comes back after a downturn.
Over the long term, the stock market has averaged an annual return of about 10%. So even if you invest in a year when the market is down, it’s likely to rebound and go up again over time.
Of course, there are no guarantees in investing. But if you invest early and take on more risk, you’ll have a better chance of achieving your long-term financial goals.
What are some good investment options for teens?
Now that you know why you should invest as a teenager, let’s look at some investment options to consider.
Here are a few investment ideas for teenagers:
- High-Yield Saving Account: A high-yield saving account is a great place to start investing as a teen. That’s because you can earn more interest than you would in a regular savings account. This can help your money grow faster. And, since the account is FDIC insured, your money is also safe. However, you won’t earn as much as you would with other investment options.
- Junior ISA: A Junior ISA is a type of investment account for UK residents under the age of 18. With a Junior ISA, you can invest up to £9,000 per year in stocks, bonds, and cash. The money grows tax-free, and you can access it when you turn 18.
- Index Funds: Index funds are a type of investment that tracks a benchmark, such as the S&P 500. They’re a good option for beginner investors because they’re diversified and have low fees. This means you can invest in a large number of stocks, which can help reduce risk. And, since index funds have low fees, more of your money will go towards investments instead of fees.
- Cryptocurrency: Cryptocurrency is a digital or virtual currency that uses cryptography for security. Bitcoin, Ethereum, and Litecoin are all examples of cryptocurrency. Cryptocurrency is a risky investment, but it can also lead to high returns. If you’re considering investing in cryptocurrency, make sure you do your research first.
These are just a few investment ideas for teenagers. Talk to a financial advisor to get more personalized advice on what’s right for you.
What are the risks and rewards of investing?
Before you invest, it’s important to understand the risks and rewards.
Investing is risky because the value of your investment can go up or down. This is called market risk. For example, if you invest in stocks, the value of your investment will go up and down with the stock market.
However, there are ways to minimize risk. One way is to invest in a diversified mix of asset classes, such as stocks, bonds, and cash. This is called diversification. Diversification can help reduce risk because it reduces your dependence on any one investment.
Another way to minimize risk is to invest for the long term. This means you’re less likely to sell when the market is down. And, over time, the market has a tendency to go up.
The rewards of investing include the potential for earning money through dividends or capital gains. Dividends are payments made by companies to shareholders. They’re typically paid out quarterly. Capital gains are profits made when you sell an investment for more than you paid for it.
Investing also has the potential to help you reach your financial goals. This is because rather than letting your money sit in a saving account where it will only grow slowly due to interest, you can invest it and potentially earn a higher return.
How much money should you invest?
The answer to this question depends on your financial goals and risk tolerance.
If you’re investing for the long term, you can start with a small amount of money. For example, you could invest $50 per month.
However, if you’re investing for a short-term goal, such as saving for a down payment on a house, you may want to invest a larger amount of money so that you can reach your goal sooner.
Your risk tolerance is another factor to consider when deciding how much money to invest. Risk tolerance is the level of risk you’re comfortable taking.
Some people are comfortable taking on more risk, while others prefer to minimize risk.
Your risk tolerance will likely change over time. For example, you may be willing to take on more risk when you’re younger and have more time to recover from any losses.
As a beginner investor, it’s important to start slow and invest only a small amount of money. You can always increase your investment amount as you become more comfortable with investing. Nevertheless, only invest the amount that you are comfortable losing.
How to open an investment account as a teen?
If you are under 18 years of age, you will need to open a custodial account. A custodial account is an investment account that is set up and managed by a parent or guardian.
There are a growing number of apps that let under-18s invest. This is great news for young people who want to get a head start on building their wealth. While there are many different ways to invest, some of the most popular options for young people include stocks and cryptos.
Bloom is a great option for those interested in investing in stocks. The app offers a simple and user-friendly platform that makes it easy to track your portfolio and make trades. Additionally, Bloom provides educational resources to help you learn more about the stock market.
For those interested in investing in cryptos, doshi is a great option. The app allows you to buy and sell various types of cryptocurrencies, such as Bitcoin, Ethereum, and Litecoin. What’s more, doshi's Learning Academy is a great way to learn more about the world of cryptocurrency investing.
The Bottom Line
We’ve seen that the earlier you start investing, the better off you’ll be down the road. You have time to make mistakes and learn from them – and your portfolio will have more time to grow.
If you have any questions about what we talked about in this article or want some help getting started with investing, please don’t hesitate to reach out!
You could also join our Discord to have access to a community of like-minded individuals who are also learning about investing, and many free resources to help you get started.
Do you have any questions or suggestions? Reach out to us on social media - we're always happy to chat!
Doshi is a crypto wallet that allows teens to learn about and explore crypto with supervision from their parents and without the fear of being scammed. You can find out more about our digital crypto wallet suitable for teens here.
The information contained in this article is not financial advice and is for general informational purposes only. Please consult your financial, legal, or tax advisor before making any decisions.
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