Investing money in stocks may seem like something that only your parents do; however, the earlier you invest your money, the more valuable it becomes. For instance, if your parents had invested $1,000 in Microsoft a year ago, they would have made $250— not bad. But if they had invested in Microsoft 5 years ago, they would have made $1500— much better. This example demonstrates the power of compound growth over time. As a teenager myself, I have learned that investing and starting my financial journey early can turn small amounts of my loose change today into real wealth tomorrow.
Why Teens Should Start Investing Early
1- The Power of Compound Growth
Compound growth is when the earnings in your savings or investment accounts are reinvested. To put it into simpler terms, not only is your original investment earning interest, but your interest is also earning interest.
Example: Let’s say year 1 is the first year you start investing
· Year 1: You invest $1,000 into an account
· End of year 1: Your investment earns 10% interest, leaving you with $1,100
· End of year 2: Your investment earns 10% interest; however, you are left with $1,210, which is 10% more than $1,100
· End of year 3: 10% of $1,210 = $1,331
If you continue this process for another 30 years, your original $1,000 would turn into $17,450
2- Long Term Goals
Even though it might not seem like the most interesting or important thing now, starting to invest today will give you a head start in achieving your long-term goals such as college savings, buying your first car, or even something as simple as buying a console using your money instead of your parents’. These are prime examples for the saying “time in the market beats timing in the market.”
Now that we know why starting your financial career early is important, let’s figure out how to start.
Tips for Parents
Even though we know that investing early matters, let’s look into different ways parents can help their kids start their financial journey.
1- Learning first, Investing second
Before you even open a custodial account for your child to invest in, make sure they know what they are doing in the first place. There are many great resources to help kids get a sense of how to invest in the stock market and learn basic financial concepts, such as the courses and articles you can find here at Edunomix, that you and your children can use to deepen your knowledge in the financial world.
2- Teen Talks: What should you discuss with your kid before starting their financial journey?
As a teenager, and even as a younger kid, there are a lot of important facts and tips that my parents have told me are essential before starting my financial journey. This could be related to investing but also to my future financial career including topics such as budgeting, managing debt, and doing research while investing. Here are some financial topics that you should discuss with your child:
· Teach them the Value of Money:
Money is not just something of value that is used to buy goods and services; it is also an asset that represents time and effort, which is why it should be used wisely and cautiously (buying the latest console or unnecessary clothes).
· Understanding Debt:
Debt is the concept in which you have asked someone or an institution for money (for example: to pay for college tuition or to start up a business) and you owe these institutions that money plus interest. Debt is generally a bad thing to get caught up in because it can grow quickly if not addressed and it can lead you into filing for bankruptcy or losing valuables that are considered collateral. However, debt is not always a bad thing: getting into debt does not negatively affect you if you make more money using the money that you originally borrowed.
· Setting short- and long-term goals:
As a teenager, it can be tempting to spend your profits from investing in unnecessary goods and/or services. Teaching your child to set short-term and long-term goals is essential to understand and plan out where this money will go in the future.
Example:
Short-term: Being able to buy a new computer
Long-term: Buying a car or saving up for college tuition
2- Opening a custodial account
While investing may be fun and cool, as a parent, you might want to find a couple of apps or websites that your child can invest through, while being able to monitor them. Here are two good examples of apps where you can open a custodial account - an account that an adult opens and manages money on behalf of a minor - and supervise your teenager’s progress:
Fidelity offers a Youth Account for teens ages 13–17, where the teen owns the account; however, parents can also monitor activity and help guide decisions. This is a great choice because it allows parents and their children to work together to make wise decisions.
· Greenlight: Debit Card for Kids and Teens | Greenlight
Greenlight is used by many children and parents across the United States for its simplicity and its safety. Parents can create an account for their child on Greenlight, giving their children access to a debit card and the possibility to research and purchase stocks; however, the parent must approve the child’s decision through Greenlight before every purchase.
Tips on How to Invest: For Teens
Investing, while it may seem intimidating to start off, is not as hard as it seems. Here are some ideas and suggestions of what you can do when you begin your investing journey.
1. Familiarize yourself with the market
Learning key concepts, such as what stocks, bonds, and index funds are, is incredibly useful when you are beginning your investment journey.
2. Start small, Grow big
While you may feel like it is not much, starting by investing $100-200 a month can increase overtime thanks to compound interest. The key is consistency.
3. A Marathon and Not a Sprint
Do not expect your money to double overnight. Looking into high-risk investments or meme stocks aren’t a good idea if you are a beginner investor: investing isn’t like a casino where you go in trying to make a quick buck. The key is to set long-term goals by looking into companies or index funds that perform well over time and pay dividends: P&G (stable stock and consistent in dividend payouts), VOO (S&P 500 ETF: allows you to invest in the top 500 US companies), Uber (consistent growth).
4. Don’t Panic Sell
It’s normal for the market to go up and down. It is not wise to sell everything the second the market goes down (unless you believe that you will lose more money if you do not sell) because the most likely scenario is that it will go back up shortly after (from experience). Instead, hold the shares or even buy more shares: buy low sell high
Conclusion
As a teenager myself, I have learned that investing is not just about making money; it is about discipline, patience, and learning from my mistakes and experience. Even saving a couple of bucks today and investing it in a company you did research on can go a long way in the future. Your financial journey may start small; however, with time and consistency, the early investment that you make can turn into massive profit margins down-the-line.
Sources
1] Image: Kennebunk Savings
2] Initial Publication: Ockham Finance