If you are a teenager, you will eventually have to become financially independent from your parents and learn how to save money. Knowing how to save for the future is essential for your financial security.
If you have ever bought clothes before, then you have invested your money. You put in your money in expectation that the clothing will be worth the return, which may not always turn out to be true. This same idea applies to investing in the stock market, as one puts money into indexes or shares of companies that they believe will become more valuable in the future.
Investing is a good practice to keep as you grow up, because it lets you be prepared for any unexpected moments in life that can be financially taxing, such as car accidents or health concerns. In addition, investing cultivates a sense of growth and accomplishment, as you get to see the money you made grow successfully. Another small benefit of investing is getting to splurge at times, like going to a good restaurant or buying that collector’s set of that video game you love.
The first step in investing is to decide on what type of investment account you want to open. There are two types of accounts I recommend a high schooler to use: a custodial account or a Roth individual retirement account (IRA). You can create these accounts with brokerage firms like TD Ameritrade and Charles Schwab. Traditionally, minors are not allowed to create investment accounts, but these methods allow for a minor to start investing before eighteen.
A custodial account is where a parent or guardian creates an investment account in the name of a minor, allowing the minor to invest in assets like stocks, bonds, and mutual funds. Generally, custodial accounts have no limits on income or contribution limits, which means there would be no worries about having to hastily transfer funds and assets. In addition, gifts and contributions can be made by family or friends to the account, whether it be ten dollars or a private jet.
One important part of a custodial account is that once the minor becomes eighteen, the minor has ownership of all assets in the account. This means even the parents who established the account can no longer access it, so make sure you are well-informed on how to handle the money responsibly. Since a custodial account counts as assets, you may be at risk of losing potential financial aid for college by creating an account, so talk to your parents about a reasonable amount of money to put into the account.
On the other hand, a Roth IRA is an account that is focused on retirement, but has the benefit of being tax-free until earnings are withdrawn. A student is eligible for a Roth IRA as long as they have earned income, which can come from a job, tips, or earnings from self-employment.
Once you obtain an account, you must decide what investments to put there. Although you are free to choose whichever investing strategy you would like, here are some general tips about how to distribute your money.
First, start learning about how the stock market works. With the plethora of resources on the internet, anyone can start reading guides on investing. As a general introduction, the stock market is the collection of markets and exchanges where investors can buy and sell shares of publicly traded companies. If you want to invest in a company, make sure they have a business model or outlook that you agree will be profitable. Investing is a long-term process, and ultimately is not about making quick cash but building wealth over time. You can buy financial securities other than stocks, such as exchange traded funds and bonds.
An exchange traded fund (ETF) is made up of multiple securities such as stocks, commodities, and bonds, and they can be traded just like a stock. ETFs track almost every asset class in the market, from the value of the dollar to the value of pineapples, making investing ideas limitless. Bonds are loans taken out by a company that an investor can buy, and they are generally safer than stocks but at the possibility of less return on investment.
If you wish to let your money sit without having to monitor the market all day, you can try and invest your money into index funds that track the majority of the stock market. These funds already account for diversity, since the fund has to own all the stocks that they track. This means that buying one share of the S&P 500 ETF, an index that tracks the 500 largest companies on U.S. stock exchanges, is like buying a small part of 500 different companies.
Overall, make sure you are not investing too much money into your account. As a general idea, try not to add as much money as you need to survive for the month. The goal of investing is to generate wealth over time, so do not panic over any sudden dips in the market and sell out of fear. Investing while you are young is beneficial, because you have the time to learn and adapt to the market.