Investing during teenage years builds valuable habits, makes the most out of compound interest, and has tax advantages. In general, the earlier you start investing, the better.
However, starting to invest as a minor will carry different rules than someone who doesn’t start investing until later in life. Therefore, it’s important to understand how minors can legally invest and what qualifies as the best investments for teens.
How to Start Investing as a Teenager
If you are a minor, you can start investing, but it needs to be done with a custodial account. These are financial accounts an adult maintains for a child or another person under the age of majority.
In most situations, the account would get set up by a parent or legal guardian. The main types of custodial accounts are Uniform Gift to Minors Act (UGMA) accounts and Uniform Transfer to Minors Act (UTMA) accounts.
As soon as money enters the account, it belongs to the teenager and the teen gains full legal control somewhere between age 18 and 21 (25 in certain situations), depending on the state.
Money put into the account, often as gifts from family members, only gets taxed at the teenager’s rate instead of the adult’s rate. This money has no strings attached as to how it should be used when withdrawn.
Acorns Early is an excellent option for an UGMA account. It’s included in the Acorns Family plan, which costs only $5 per month. Within a few minutes, adults can open an account for teenagers or even younger children.
It costs nothing extra to add multiple children, so it’s an especially appealing option for larger families.
For teenagers who have an interest in stock picking, consider opening a Greenlight account.
When teenagers have some control over their custodial account investments, it can provide valuable financial literacy for the future. Since Stash offers fractional shares, it’s possible to invest in the stock market with $5 or less. A basic Stash plan is only $1 per month.
What Should a Teenager Invest Money In?
With the amount of time teenagers have on their sides, index funds usually act as the best way to accumulate wealth long-term. A stock index is a group of stocks from a variety of companies.
Index funds, like VTI or VTSAX, that track the total stock market, or a broad section of it, provide diversification. By diversifying your investments, this decreases the level of risk in your portfolio.
Indexes tend to fluctuate less than individual stocks and they don’t require active management on your part. These act as long-term investments, which work well for younger investors.
However, many teens consider index funds less exciting than individual stocks and want to own shares of companies they know and love. If you choose to start investing in individual stocks, try to stick to blue-chip stocks.
Blue-chip stocks come from established, well-known companies. These stocks are safer than small, newer companies at-risk of going bankrupt. A combination of investing in an index fund as well as individual stocks is also an option. It doesn’t have to be one or the other.
Make sure you use some of the best stock research tools to learn more about your investment options and use them to understand how the stock market works.
What Should I Invest $1,000 In?
If you’re an older teenager aged 18 or 19, it’s possible you already have some debt and you may have little to no savings. If you have a large balance on a high-interest credit card, pay that off before investing your money.
In the event you have no savings and are unable to receive financial help from family in the event of an emergency, focus on building an emergency fund in a high-yield savings account first.
However, if you don’t have “bad debt,” such as credit cards and already have a financial cushion, you can easily start investing with $1,000 or even less.
This is enough money to buy a few shares of many popular index funds or individual stocks. If you choose to focus on investing in growth stocks, create a portfolio with a few shares of several of your favorite stocks, rather than spending it all on one stock.
Fractional investing allows you to own a portion of stocks. For example, you may not have enough for both a share of Zoom and a share of Tesla, but you could purchase half a share of each.
If you’re a parent, consider the best way to invest $1,000 for a child‘s future.
How Can I Invest at 14?
At age 14, your savings goals are likely different than older teens. You may be saving up for a car (which isn’t the best investment if you can avoid it), college or a trade school, or even be thinking ahead to your future home and retirement.
At this age, it’s best to consider a combination of short-term and long-term investments.
If you invest in index funds or stocks, you can sell these appreciating assets at any point when you need more money, whether that’s for a dream wedding in your 20’s or when you finally reach retirement.
To invest as a minor, you will need a trusted adult to set up an UGMA account, such as Acorns Early, or an UTMA account. The money in these custodial accounts belongs to you, but the adult will oversee any trades you want to do.
If you earn money from a job like a freelance writer, lifeguard, lawn care or others, you can also have an adult help you set up a retirement account.
Best Investment Plan: Start a Roth IRA
It’s possible to open either a traditional or Roth individual retirement account (IRA) for teenagers.
Roth IRAs are usually the better to start with because you pay taxes on contributed money right away when your income is lower. With a traditional IRA, you pay when you withdraw money.
Since the teenager will likely make more money as they age, it’s advantageous to pay the taxes while in a lower tax bracket.
Unlike other custodial accounts, minors don’t qualify for a Roth IRA until they have jobs that earn them money. The 2021 joint annual contribution limit for traditional and Roth IRAs is $6,000, but that doesn’t necessarily mean that the full amount can be contributed.
The yearly contributions can’t exceed what the teenager earned that year, which would show on their taxes.
For example, if a teenager made $5,000 waitressing in one year, that’s the maximum that could be contributed. However, it doesn’t matter who makes the contributions.
Parents could make a deal with their child that if she contributes $1,000 out of the $5,000 she made that year, that they’ll contribute the remaining eligible $4,000.
The M1 Finance custodial Roth IRA is a great option. M1 Finance’s Roth IRA allows you to set up an automated portfolio based on current age and how long until “retirement age,” which the IRS deems to be 59.5.
The investing app automatically rebalances your investments over time to go from being more aggressive to more conservative as the person gets closer to retirement.
Best Investments for a Teenager
Teenagers don’t have to wait to invest. With the use of custodial accounts, they can invest in index funds, stocks, and even retirement accounts.
It doesn’t take much money to get started and compounding interest can make small, yet consistent contributions grow into substantial amounts.
When teenagers invest, it can also spark an interest in finance that can spread to other aspects of the financial world. This might soon lead to an interest in opening a kid’s debit card to manage their spending and saving as well.
About the Site Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see the disclaimer on my About Young and the Invested page.