There are many reasons why teens and those who may have not yet reached the age of legal adult adulthood should invest. The most significant advantage is the time they have to allow their investments to grow and increase in value. Sometimes it might seem confusing where to begin, but it does not have to be. There are many strategies and tools to help young people as they begin their investment journey. In this article, we break down the most important things that teens should know about investing.
KEY TAKEAWAYS
- People who have not yet reached the age of legal adulthood have various options to begin investing in coordination with a parent or responsible adult.
- Beginning to invest at a young age provides significant advantages, as investments have a longer time to grow and benefit from the power of compounding.
- Although many brokerages and trading platforms have age restrictions, there are apps specifically geared toward teen investors.
Some people may have a misconception that investing is off-limits for people who are not yet legal adults. But unlike the casino or the bar, there are no age restrictions on investing. It is true that you generally need to be at least 18 years old to open your own brokerage account, but people younger than that have plenty of options to invest—although they require varying levels of supervision or collaboration with an adult.
”The one thing, the last true edge in investing, is really time in the market.
Timi OwopeNetworth Online Co.
The Importance of Investing Early
Beyond just being allowed to invest, younger people have an upper hand—quite simply, the sooner you begin investing, the more time your money has to grow. This early-mover advantage for younger investors is magnified by the power of compounding. As you reinvest your capital gains and interest to generate additional returns, the value of your account can snowball higher, making it even more beneficial to start investing while time is on your side.
A quick example can illustrate the advantages of getting an early start. Let’s say you begin to invest for retirement when you begin your career at age 22. If you consistently set aside $100 per month and earn a healthy 10% return on your investment (compounded annually), you would have $710,810.83 when you reach age 65. However, if you had started investing at age 15, you would have $1,396,690.23, or nearly double the amount.
Custodial Accounts
In a custodial account, an adult controls the investments on behalf of a minor until they reach 18 or 21 years of age, depending on the state. Custodial accounts under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are a great way to transfer assets to a child or teen, but the custodian adult maintains the legal responsibility and the final say over the investment decisions.2
People younger than 18 can even get an early start on retirement planning through a custodial Roth individual retirement account (Roth IRA), but they will need earned income from a job or another paid activity to begin contributing.34 There are also joint brokerage accounts that allow minors to share legal ownership with an adult, which may help younger people take a more active role, although investment decisions are generally subject to approval by the adult co-owner.
Are You Ready to Invest?
The benefits of investing when you’re young are clear enough, but some teenagers may still be wondering if they’re prepared to take the leap. Here are a few questions teens may want to ask themselves as they consider whether the time is right to make their first investments:
- Do you have money from a job or another source that you won’t need to access immediately?
- Can you afford to lose this money if your investments don’t play out as planned?
- If you’re under age 18, do you have a parent or another adult willing to help you invest?
- Do you know what you’re getting into? In other words, do you understand the investment you’re considering and how it works?
According to Adams, companies that teenagers frequently interact with can spark an interest in investing. Buying shares of a familiar company is a way to enter the stock market while following the critical advice of investing in what you know.
“Being engaged with companies you see on a regular basis gets you interested, makes you want to understand how they tick, how they grow, how they make decisions,” Adams says. “And then once you kind of understand that, digging a little deeper and asking the question of: Do I think this is good, do I think this is going in the right direction, and then do I have money that I want to invest in it?”
