Simple but Detailed Guide to Investing for Kids and Teens
Investing can be a valuable tool for building wealth and securing financial stability, but it’s often seen as something that’s only accessible to adults with significant resources and knowledge. However, there’s no reason why kids and teens can’t start investing early and take advantage of the power of compounding over the long term. By starting early, young investors can develop good financial habits and gain valuable experience with investing that can set them up for a lifetime of financial success. In this article, we’ll explore the benefits of investing for kids and teens, the different types of investments they can make, and strategies for getting started. Whether you’re a young investor yourself or a parent or guardian looking to help a child or teen start investing, this article will provide valuable insights and guidance on the exciting world of investing for the future.
What is investing
Investing is the act of allocating resources, typically money, with the expectation of generating a profit or gaining a return on investment in the future. It involves purchasing assets that have the potential to increase in value over time, such as stocks, bonds, mutual funds, real estate, or cryptocurrencies. The goal of investing is to use your money to make more money and to build wealth over time. Successful investing requires knowledge, research, and discipline to make informed decisions and manage risks effectively.
Here are a couple of simple examples to explain investing to kids
The first one is saving money in a piggy bank. You can explain to kids that when they put money in a piggy bank, they’re saving it for a future purchase. Investing is similar, but instead of just saving money, they’re putting it to work to make more money over time. They can think of investing as a way to grow their savings so that they can buy even more things in the future.
Another one os planting a seed. You can use the analogy of planting a seed to explain how investing works. When you plant a seed, you have to wait for it to grow into a plant. It takes time, water, and sunlight. Investing is similar, in that you put money into an investment and over time it grows, thanks to things like compound interest and market growth. The longer you wait, the bigger the investment can grow, just like a plant that grows taller and stronger over time.
Why investing for kids and teens is important
Investing for kids and teens is important because it can help set them up for long-term financial success. By starting to invest early, young people have the opportunity to take advantage of the power of compounding, which means that their money can grow exponentially over time.
Investing can also teach kids and teens valuable financial skills, such as budgeting, saving, and understanding the concept of risk and reward. It can help them develop a sense of financial responsibility and independence, and give them a head start in building wealth for their future.
Additionally, investing can provide a way to pay for higher education or other major expenses in the future, such as a down payment on a home or starting a business. It can also help young people prepare for unexpected financial challenges, such as medical emergencies or job loss.
Overall, investing for kids and teens is an important tool for building financial literacy and laying a foundation for a secure financial future.
Benefits of investing for kids and teens
There are several benefits of investing for kids and teens, including:
Building wealth: Investing can help young people build wealth over time by taking advantage of compounding returns.
Learning financial responsibility: Investing can teach kids and teens valuable financial skills such as budgeting, saving, and understanding the concept of risk and reward.
Setting financial goals: Investing can help young people set financial goals and work towards achieving them.
Preparing for the future: Investing can provide a way to pay for higher education or other major expenses in the future, such as a down payment on a home or starting a business.
Managing risk: Investing can help young people learn how to manage risk and make informed decisions about their money.
Gaining independence: Investing can give young people a sense of financial independence and responsibility.
How investing for kids is different from investing for adults
Investing for kids and teens is fundamentally different from investing for adults. When investing for children, the goal is to teach them the basics of sound financial management while also helping them grow their savings over time. For this reason, investments chosen should focus on low-risk options such as stocks or mutual funds that are designed to produce steady returns over the long-term. In addition, investing for children should be done with a longer timeline in mind – while adults may focus on short-term gains, building young investors’ portfolios should look at the bigger picture.
Investing for kids and teens also requires tailoring the investment for their age group and giving more control as they grow older. For younger children, parents or guardians can open a custodial account in their child’s name to begin building their portfolio. The investments chosen should be simple and low-risk to help them understand the basics of investing, such as stocks, mutual funds, bonds, ETFs and other options. As the child grows older and gains more financial literacy, they can begin to understand the concept of diversification and expand their portfolio.
It’s important to reinforce good habits in young investors, such as patience and discipline. Start educating them about investing early on by discussing topics like budgeting, interest rates, inflation, taxes and risk management. Teaching these basics from an early age can help set them up for future success.
When investing for kids and teens, it’s important to focus on the long-term. Explain that investments should be made with a goal in mind, such as how much they want to save toward college tuition or retirement. Help them understand that fast returns don’t always equate to sound investments and encourage them to diversify their portfolio.
It can also be beneficial to use educational investing tools, like online simulators or apps. These platforms allow kids and teens to practice trading stocks without risking real money. It provides an opportunity for them to try different strategies and learn more about the stock market.
Legal and regulatory requirements: Minors cannot legally enter into contracts or make investment decisions on their own, which means that their investments must be managed by an adult, usually a parent or guardian. This can involve setting up custodial accounts or other types of accounts that are managed jointly by the child and adult.
Risk tolerance: Kids and teens may have a lower risk tolerance than adults, which means that they may be more comfortable with conservative investments such as bonds or mutual funds. They may also need more education and guidance around investment risk and how to manage it.
Investment horizon: Kids and teens have a longer investment horizon than adults, which means that they can take advantage of the power of compounding over a longer period of time. This can lead to greater investment returns over the long term, but it also means that they may need to be more patient and willing to ride out short-term market fluctuations.
Investment goals: Kids and teens may have different investment goals than adults, such as saving for college or a first car. They may also have less disposable income than adults, which means that their investments may need to be smaller in scale.
Education and guidance: Kids and teens may need more education and guidance around investing, including basic financial literacy and understanding of investment concepts. This may require a different approach to investing education, such as using interactive tools or games to make investing more accessible and engaging.
Type of Investments
There are five major types of investment that can be used by both adults and kids (with the help of their parents): stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and cryptocurrencies.
Stocks are shares of ownership in a company, and investing in stocks means purchasing a portion of that ownership. Kids and teens can invest in stocks through custodial accounts with their parents’ or guardians’ approval. They can research companies they are interested in and invest in those that they believe have strong growth potential. However, they should also be aware that stock prices can be volatile and there is risk involved in investing in individual stocks.
Bonds are a type of debt security where investors lend money to an entity, such as a corporation or government, in exchange for periodic interest payments and the return of the initial investment at the bond’s maturity. Kids and teens can invest in bonds through mutual funds or exchange-traded funds (ETFs) that invest in bonds. Bonds are generally considered less risky than stocks, but offer lower potential returns.
Mutual funds are a type of investment that pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. Kids and teens can invest in mutual funds through custodial accounts or with the help of their parents or guardians. Mutual funds can offer diversification and professional management, but also charge fees that can impact returns.
ETFs are similar to mutual funds, but trade on stock exchanges like individual stocks. They offer exposure to a diversified portfolio of securities, and are generally more cost-effective than mutual funds. Kids and teens can invest in ETFs through custodial accounts or with the help of their parents or guardians.
Real estate investing involves purchasing properties with the intention of generating rental income or selling them for a profit. Kids and teens can invest in real estate indirectly through real estate investment trusts (REITs), which are companies that own and manage income-producing real estate. REITs can provide exposure to the real estate market with relatively low minimum investment requirements.
Cryptocurrencies are digital assets that use cryptography to secure and verify transactions, and operate independently of central banks. Kids and teens can invest in cryptocurrencies through cryptocurrency exchanges or investment platforms, with the help of their parents or guardians. However, investing in cryptocurrencies can be highly volatile and speculative, and should be approached with caution.
How to Start Investing for kids
Here are some steps that kids can take to start investing:
Learn about investing: Kids should educate themselves about different types of investments and the risks and rewards associated with each one. They can start by reading books, articles, or online resources on investing.
Set financial goals: Kids should set financial goals, such as saving for college or buying a car, and determine how much money they need to achieve those goals.
Save money: Kids should save money from allowances, gifts, or part-time jobs. They can start small and gradually increase their savings over time.
Open a custodial account: Kids under 18 can open a custodial account with the help of their parents or guardians. A custodial account allows them to invest in stocks, bonds, mutual funds, or ETFs.
Start with low-risk investments: Kids can start with low-risk investments such as bonds, mutual funds, or ETFs, which offer diversification and professional management. They can gradually move to riskier investments such as stocks or real estate as they gain more experience and knowledge.
Monitor investments: Kids should monitor their investments regularly to track their progress and make informed decisions about buying or selling.
Seek guidance: Kids should seek guidance from a trusted adult, such as a parent, guardian, or financial advisor, to help them make informed decisions about investing.
Investment Strategies for Kids and Teens
Here are some investment strategies for kids and teens:
Buy and hold strategy: This strategy involves buying stocks, mutual funds, or ETFs and holding onto them for the long term, regardless of short-term market fluctuations. This approach can help young investors take advantage of compounding returns and build wealth over time.
Dollar-cost averaging: This strategy involves investing a fixed amount of money on a regular basis, such as monthly or quarterly. By investing a fixed amount at regular intervals, young investors can take advantage of market volatility and potentially buy more shares when prices are lower.
Diversification: This strategy involves investing in a variety of different assets, such as stocks, bonds, real estate, and cryptocurrencies, to reduce risk and maximize returns. Diversification can help young investors weather market volatility and achieve long-term financial goals.
Value investing: This strategy involves looking for undervalued stocks or assets that have strong growth potential. Young investors can research companies or assets they are interested in and look for ones that have a strong financial foundation, good management, and a competitive advantage in their industry.
Index investing: This strategy involves investing in an index, such as the S&P 500, which tracks the performance of a group of stocks. Index funds or ETFs can offer low fees and a diversified portfolio of stocks.
Long-term growth: This strategy involves investing in assets with strong growth potential over the long term. Young investors can look for companies or assets that are positioned to benefit from long-term trends, such as renewable energy, technology, or healthcare.
Why start investing early
Starting to invest early has several benefits, and the first one is the power of compounding. The power of compounding is a fundamental principle in investing. It refers to the idea that your investment returns can generate additional returns over time, leading to exponential growth in your investment portfolio. For example, if you invest $1,000 at a 10% annual rate of return, your investment will grow to $1,100 after the first year. However, in the second year, your investment will grow to $1,210, as you earn a return not only on your initial investment but also on the $100 in investment earnings from the first year. Over time, compounding can significantly increase your investment returns, especially if you start investing early and allow your investments to grow over the long term.
More time to recover from market downturns: Investing involves risk, and markets can experience downturns from time to time. However, by starting to invest early, you have more time to recover from any short-term losses and benefit from long-term gains.
More flexibility with investment choices: Starting to invest early gives you more time to experiment with different investment strategies and asset classes, such as stocks, bonds, or real estate. You can also take on more riskier investments, such as stocks, as you have a longer investment horizon.
Develop good financial habits: Starting to invest early can help you develop good financial habits, such as saving regularly, budgeting, and managing risk. These habits can set you up for long-term financial success.
What age you can start investing at?
The age at which you can start investing depends on the laws in your country or state, as well as the policies of financial institutions or brokerage firms. In many places, you need to be at least 18 years old to open a brokerage account or make investments on your own. However, some financial institutions may allow minors to open custodial accounts with the help of a parent or guardian. Custodial accounts are managed by an adult until the child reaches a certain age, such as 18 or 21, at which point the account is transferred to the child.
In the United States, the age at which you can start investing depends on the type of investment and the state in which you reside. However, generally speaking, you need to be at least 18 years old to open a brokerage account and make investments on your own. Some financial institutions may allow minors to open custodial accounts, which are managed by an adult until the child reaches a certain age, typically 18 or 21.
In the UK, the age at which you can start investing also varies depending on the type of investment and the financial institution. In general, you need to be at least 18 years old to open an investment account and make investments on your own. However, some financial institutions may allow minors to open junior ISAs (Individual Savings Accounts) or other types of investment accounts with the help of a parent or guardian. These accounts are managed by the parent or guardian until the child reaches the age of 18, at which point the account is transferred to the child.
It’s important to note that investing always carries some level of risk, and it’s important to carefully consider your investment goals, risk tolerance, and financial situation before making any investment decisions. If you are under 18 and interested in investing, it’s a good idea to talk to a trusted adult or financial advisor to explore your options and develop a sound investment strategy.
Yes, kids and teens can invest in the stock market with the help of an adult. Parents or guardians can open a custodial brokerage account on behalf of the child and manage the investments together.
The best types of investments for kids and teens are typically those with lower risk, such as mutual funds or exchange-traded funds (ETFs). Real estate and cryptocurrencies can also be viable options, but require more research and knowledge.
The amount of money needed to start investing can vary, but there are some options that allow for lower minimum investments, such as mutual funds or ETFs. Some brokerage accounts also have no minimum investment requirements.
No, kids and teens cannot make their own investment decisions without the help of an adult. Minors are not legally allowed to enter into contracts or make investment decisions on their own, so investments must be managed jointly with an adult.
Starting to invest at a young age can help kids and teens develop good financial habits, gain valuable experience with investing, and take advantage of the power of compounding over the long term. It can also set them up for a lifetime of financial success and provide a solid foundation for building wealth.
David is an advocate of financial literacy. Having previously worked as a financial advisor and being a father of two daughters, he wants to show solutions to improve financial behavior.
