Perhaps you’ve recently come into some money through inheritance, a summer job, or graduation money. What are some ways you can multiply your savings through smart investing?
While the term “investing” might elicit images of suspiciously energetic Wall Street traders yelling into their phones, don’t be intimidated. Over half of Americans invest, and it’s never been easier to pool some of your money into potentially high-yield assets.
Plus, the earlier you invest, the better.
- If you open a Roth IRA when you’re 18 and put just $1,000 in it, assuming a conservative 7% annual interest, your initial $1,000 will be worth nearly $18,000 by the time you’re 60.
- If you set up $30 monthly deposits into that account, you’ll have over $100,000 by age 60.
- If you can deposit $30,000 into a Roth when you’re 18, you’ll be a millionaire by 60!
Opening a Roth at 18 with $1,000 and $0 monthly deposits, graphic courtesy of investor.gov
Going to sleep at night knowing you’ll be a millionaire sounds great. But what should you know before investing as a teen? Where should you invest, and how? If you have social anxiety, what’s the best way to invest with minimal human interaction?
Let’s dive into investing as a teen.
What you should know before investing as a teen
In light of the tragic and premature passing of Alexander Kearns, it’s important to emphasize that investing isn’t without risk, both financial and psychological. However, if you take it slow, follow guidance, and only invest small amounts at a time, you can exponentially increase your chances of success in the long term.
Here are five ways to increase your chances of success in the investment “game”.
Know the requirements
Depending on your state, the minimum age to invest in stocks and real estate is either 18 or 21.
- Stock market – In order to invest money into the stock market, you must open what’s called a brokerage account, where you deposit money with a licensed broker (i.e. a person, firm, or app like Robinhood) who trades on your behalf. The minimum age to open an account is usually 18. However, you can open what’s called a custodial brokerage account with your parents and trade just like an adult!
- Real estate – Similarly, in the real estate world, you need to be 18 to sign most of the paperwork required to own property.
Talk to your parents
Even if you’re already 18, you should be transparent with your folks about your investment plans. Chances are that they have at least a retirement account and have lived through economic ups and downs, so they know something about managing money and investing that you don’t. Plus, they’ll probably appreciate that you came to them first for guidance and support.
Best of all, your parents might be able to connect you directly to their financial advisor. Being grandfathered into your parents’ chosen advisory firm is an excellent way to capitalize on a pre-existing relationship (and get some free professional advice!).
Get advice and guidance from professionals (not from your friends)
Investing can be exciting. With more and more people jumping on apps like Robinhood you may hear enticing scuttlebutt about “the next big IP” or find yourself jealous of someone at school who reportedly “just made $500 off of a single trade.” You may also find yourself sucked into amateur investing nuthouse r/wallstreetbets.
But when it comes to handling your hard-earned money, it’s critical never to let emotion trump logic. There’s a common saying in the professional world that applies to virtually everything:
“Trust, but verify.”
Let data guide your investment decisions, and never jump on bandwagons. If you’re ever unsure about a certain trade or investment, ask a professional for advice and do some free research online.
Also, let’s briefly touch on “meme stocks” like GameStop, AMC, and BlackBerry. These are stocks that amateur investing forums like r/wallstreetbets have artificially inflated through sheer brute force trading. They’re exciting to watch, but the volatile tug-of-war between Reddit and Wall Street hedge funds is not a safe place for a long-term portfolio.
Consider clubs and virtual trading
That’s not to say, however, that investing shouldn’t be social. Quite the contrary; building a circle of financially literate friends is one of the best ways to keep yourself accountable and accelerate the learning process. See if your school has an amateur investors club, and join up! Ask around for some referral codes, too, since many investing platforms will give you and your friends free shares of stock just for signing up.
Once you find a healthy cabal to learn and invest with, consider starting off with a virtual trading account. Also known as paper trading (weirdly), virtual trading involves making real trades with fake money.
Start slow and be patient
Investing is a skill, and skills are mastered slowly. Once you’re comfortable with paper trading, the best next step is to invest the smallest possible amounts in the most places, and simply observe how your money changes over time. This way, you’ll learn how to invest in different assets, use different platforms, and most critically, how to monitor your investments over time so you can react dynamically to the markets.
The key to successful investing is to go in with the intention to learn, not to earn. Expensive mistakes are made when amateur investors try to make millions overnight by throwing their money into the wrong places. Actual millions are made over years and decades of smart choices supported by humility, patience, and research. Statistically, more than half of rich Americans got rich by investing 20% of their income for 30 years. Contrary to what the media depicts, most rich people are tortoises, not hares.
With these disclaimers out of the way, what are some things you can invest in, and how can you do it?
What are some good investment opportunities for teens?
The U.S. economy doesn’t allocate special investment opportunities for young people, so you’ll be investing right alongside adults and pros. That being said, there are a few investment opportunities that are youth-friendly.
The simplest and easiest way to invest is through the purchase of stock. Stock, measured in units of “shares”, is a piece of a company that entitles you to a percentage of its earnings. If you purchase a share of Apple stock (known by the stock ticker symbol AAPL), you are now entitled to some of the money that Apple makes. Neat, huh?
It’s important to distinguish stock from percentage ownership. If you buy 10% of all TSLA stock, that doesn’t mean you now own 10% of Tesla’s cars, buildings, and Elon Musk’s desk chair. It means that you’re entitled to a large percentage of Tesla’s earnings.
There are two ways you can make money off of stocks.
First, some companies will pay you a “dividend,” i.e. a share of its earnings commensurate with the amount of stock you hold. If you own one share of AMZN valued at $100 with a “div yield” of 5%, Amazon will send you a check for $5. Dividends are most commonly paid out on a quarterly basis, and div yields can fluctuate over time.
Second, some companies will not pay you a dividend for owning stock (known as a div yield of zero), but will instead reinvest shareholder dividends into the company. Why would a company withholding your dividend be a good thing? Because that reinvestment will typically raise the value of the company, and thus your stock.
Using the previous example, AMZN might withhold your $5 dividend, but by reinvesting it into the company, they’re able to raise their stock price to $120. So you didn’t get your $5 check, but the value of your share went up $20.
An ETF, or exchange-traded fund, is a bunch of stocks and other investments all bundled together and traded like a single stock. An ETF can contain hundreds, even thousands of stocks and other assets. It may be industry- or region-specific, and some even include stocks from across the world.
Investors like ETFs because they provide a convenient way to invest in certain market segments without researching and buying tons of individual company stocks. For example, let’s say you want to invest in solar energy. You could take a whole year to research individual solar energy companies, pay commissions on every trade, and set up tools to monitor 100 different stocks you now own. OR… you could purchase a solar energy ETF in a single trade and voila, you’re invested in solar energy.
In addition to added convenience and lower trade fees, ETFs are lower risk than individual stocks. If you invest in a solar energy ETF and one of the companies within tanks, guess what? The other thousands of companies within the ETF are doing fine, so your investment is safe.
In summary, if buying stock is an investment into a single company, an ETF is like an investment into a whole country, industry, or other market segment.
Mutual funds are similar but different from ETFs. Both are “grab bags” of stocks and other assets that generally represent an entire market segment, but differences emerge in how they’re traded and managed.
First, ETFs are traded just like stocks – you can buy and sell them throughout trading hours (weekdays 9:30 AM through 4 PM EST). By contrast, the value of mutual funds is calculated at the end of trading hours, and that’s the only time they can be purchased.
Second, ETFs are passively managed while mutual funds are actively managed. Unlike in ETFs, people way smarter than you and me will constantly move around the stocks and assets within a mutual fund to maximize value for holders (investors).
As a result, mutual funds often have high minimum investments (often ~$2,000) and high management fees, but are higher yield (payout more money) and safer investments than ETFs.
How to invest in stocks, ETFs, and mutual funds
Here’s a short guide to getting started in stock investing.
- Designate a budget. Start small, with $100 or less, until you learn the ropes and feel comfortable investing more.
- Choose a broker. A broker can be a person, website, or app that executes trades for you. For a detailed breakdown of your options, see my breakdown of the best investment tools for teens below.
- Open a brokerage account. When you choose a broker like E*TRADE, they’ll prompt you for some personal information and to deposit some funds into your account to invest. If you haven’t involved your parents yet, this is a great place to start.
- Purchase your first share. Forget the ticker tapes and sweaty brokers shouting into phones. Purchasing stocks, ETFs, and mutual funds through an online or app-based broker is as easy as purchasing something on Amazon Prime.
- Monitor your portfolio. Once you’ve invested your first $100, take a few weeks to simply monitor your portfolio. Get familiar with your chosen broker’s market observation tools, and read news about the companies you’re invested in.
Also, consider real estate while you’re young
If the stock market enables you to invest in companies and industries, real estate enables you to invest in land and buildings. Generally speaking, real estate investment requires more research and money upfront, but can generate higher yields (earnings) in the short term.
The most common and beginner-friendly method of real estate investing involves purchasing a residence and renting it out. For example, if you buy a house or condo in your teens or early 20s (yes, it’s not impossible) and become a landlord, you can collect rent money (~$1,000+) every month while your property appreciates in value. The rent money can help offset your student loans or pay off your mortgage sooner, and you can even sell off your equity in the home for a big payoff if you need it.
In addition to residential, you can invest in commercial and industrial real estate, although these are generally reserved for professionals or high-net-worth individuals since the buy-in is so high.
How to invest in real estate
Here are the basics to help you get started with real estate investing:
- Designate a budget. Remember, investing in real estate is a huge commitment of time, research, and money. Depending on your local market, a 20% down payment on a single-family home could range from $10,000 to $50,000.
- Do your research. Websites like Zillow and especially Roofstock are great places to begin browsing the housing values of certain neighborhoods in your city.
- Talk to a licensed realtor. Real estate is a relationship-based business, and many realtors will gladly spend 30 minutes on the phone with a prospective one-day buyer. Ask your parents to connect you to a local agent with whom you can discuss neighborhoods, housing trends, and potential investment opportunities.
- Do your financial homework. Purchasing a home as an investment follows the same steps and principles as purchasing your first residence.
- Make your purchase and find renters. If the timing is right, the market is ripe, and your finances are in order, it may be the right move to become a homeowner in your teens! Roofstock is a great online real estate broker that not only charges half the commission of regular brokers, but comes with a 30-day money-back guarantee and can even help you find renters (or homes with renters already in them)!
Retirement accounts (aka “Millionaire Accounts”)
The term “retirement account” might sound boring, and feel way too far off into the distance to care much about in your teens.
So if it helps, call it your “millionaire account” instead. Same thing.
Compounding interest in your retirement accounts means that if you start earlier, you’ll have exponentially more money waiting for you as you approach your golden years. If you can just invest $45 per month beginning at age 20, you’ll be a millionaire by age 65.
Think about it; if you take 30 minutes to set up a Roth IRA today and link auto-deposits from your bank, you can sleep tonight knowing you’re a millionaire.
Well, an eventual millionaire.
But what exactly is a retirement account?
Broadly speaking, your retirement account is a collection of investments usually directed by a broker (a person or company that invests for you for a small fee) that you promise not to touch for a loooong time. That gives your investment time to grow and compound so there’s a big pile of cash waiting for you in your 60s, when you can legally withdraw from your retirement account without tax penalties.
On that note, the other huge perk to stashing money into a retirement account in your teens is the tax benefits. Sounds boring, but hear me out; if you’re young, it means you don’t have much tax liability. No offense, but you probably aren’t earning enough to be hit with larger state and federal income taxes.
That means you’re in a precious window of time when the cash you earn is almost entirely yours, not the government’s. If you let your money sit in your checking account it’ll just lose value due to inflation. Even if you invest it in stocks or real estate, Uncle Sam will take a cut via capital gains taxes and property taxes, respectively.
BUT, if you stash it in a retirement account like a Roth IRA or 401(k), it’ll not only multiply, it’ll be subject to significantly fewer taxes. That’s because retirement accounts follow a different set of rules than traditional investment portfolios. You basically promise the government not to touch them until you reach retirement age, and in return, they don’t touch it either. You can pull from your retirement accounts if you need to, you’ll just be subject to some high fees.
Unless you’re already working full-time for a large employer, chances are that you don’t yet qualify for the most popular type of retirement account: the 401(k). You can, however, open an account called a Roth IRA, which isn’t tied to your employment status and accumulates money just like a 401(k).
It’s my personal opinion that opening a Roth IRA in your teens and setting up monthly contributions of ~$50 is the single best investment you can make in your lifetime. You can set it up once, check on it once a year, and spend the rest of your working years in relative peace.
How to open a retirement account as a teenager
Here are the basics to get you started:
- Choose an account type. The best retirement account type for teens is the Roth IRA, since it’ll likely take you years to reach the maximum annual contribution (~$6,000) and you can always supplement it with an employer-sponsored 401(k) later.
- Open a retirement account. Most brokerage firms, sites, and apps will have an option early on to open a retirement account.
- Set up regular contributions. Setting up auto-contributions to your retirement account may be the single best investment move you’ll make in your life. I think it’s worth reiterating that someone who invests $45 per month beginning at age 20 will be a millionaire by age 65. If you’re unsure where you’ll get $45 each month, get creative in your budget. Five friends and I all share accounts on Hulu, Spotify, HBO, Netflix, and YouTube Premium. That way we each pay $15 per month instead of $60, and the rest goes into our retirement accounts.
- Leave it be. Once you’ve set up your account and some automatic deposits, it’s usually best just to let your retirement account be. Let the professionals handle the investments in your retirement account while you invest in stocks and real estate with a separate pile of money.
What are some good tools for teen investors?
Now that we’ve covered four popular ways for teens to invest, how should you invest? What platforms and tools exist to help your early investments become a success?
The aptly named Robinhood is a brokerage app that seeks to share the investing tools of the wealthy with the rest of us. It offers a fast and convenient way to buy and sell stocks, ETFs, even crypto (although many pros avoid crypto due to its volatility and lack of regulatory oversight or understanding).
Robinhood is especially friendly to beginners since it offers educational materials, low buy-in amounts, and even the ability to purchase fractional shares.
If you’re looking for an investment platform that offers low-cost investment options AND a social aspect, Public should be your go-to company. You’ll get a totally commission-free experience, and you’ll be able to interact with other Public users and get a sense of what they’re investing in and why.
You’ll have access to beginner investors like yourself, as well as investors that have been in the game much longer. With Public, you’ll be able to invest in fractional shares of stocks, so you don’t have to worry about having a ton of money in the bank. You can get started with just a couple of dollars.
E*TRADE is the only option on this list that charges a commission ($4.95 per trade), but in exchange, it offers much greater access to international stocks, ETFs, and mutual funds.
The E*TRADE platform is considered more “old school”, but that can be a good thing. The tech is well-designed and stable, and their back catalog of educational materials is extremely thorough and extensive.
Since you’ll be making lots of trades early on to learn the ropes, you may want to start on a commission-free platform. Then, as you feel confident in moving more money less often, and want a much bigger list of asset options, consider moving over to E*TRADE.
Tailored, 1-on-1 financial advice from a seasoned professional can be costly, especially for new investors who need advice the most. Enter the rise of robo-advisors.
Though they sound like the precursor to SkyNet, robo-advisors like Betterment replace human financial advice with AI and algorithms. They’ll prompt you for your personal information, your investment amount, and your investment goals, and invest your money for you in exchange for a very small fee (~0.25% annually).
In addition to convenience, robo-advisors are a great way for you to invest if you suffer from social anxiety and find the prospect of discussing money with someone uncomfortable. Although a truly professional financial advisor will never judge you or your net worth, working with AI removes that feeling entirely.
Read More: The Best Robo-Advisors
It’s never too soon to think about investing. As illustrated, even the smallest amount you can invest as a teen (like $50 per month) can turn into millions by the time you really need it.
The easiest way to avoid mistakes is to take it slow, soak up knowledge, and make decisions based upon data and guidance, not emotion.