If you want to start investing at 18, you’re already on the right track. Getting started early puts you ahead later in life because many people don’t think about investing until they’re well into their careers.
The issue, of course, is learning how to start investing at 18 (or before).
Below, we’ll explore some of the many benefits of being a young investor and how to start.
We’ll also discuss the roadblocks to investing if you’re under 18 and how to legally get around those so you can get a head start on your financial future.
Why Should You Start Investing at 18?
The minimum age to begin investing is 18, although some states have raised that to 21.
So you can invest at age 18 in most cases, but why should you?
After all, 18-year-olds tend to earn less than older adults for obvious reasons.
Many don’t have any big financial goals — aside from higher education — coming up soon either.
For these reasons, it’s tempting to spend all the money you earn when you’re young. However, it’s best to start investing as early as possible. Your future self will thank you, and here are several reasons why:
The power of compounding
Compound interest, or compounding, is simply when your investment earnings or gains make you more money.
For example, say you invest $100 in a stock that grows to $110 in one year. That’s a 10% increase over that year.
Now, say your investment grows another 10%. It’s now worth $121, meaning you earned $11 instead of $10 — since you’re now earning interest on $110, not just the original $100.
It’s like a snowball rolling downhill — it gets exponentially bigger over time.
The earlier you invest, the more time your money has to compound, meaning your investments could be worth a lot more later.
Here’s another example to show just how powerful it is:
Pretend Investor A and Investor B — both 18 — are investing over 40 years into the same fund with a 7% annual return.
Investor A invests $10,000/year from age 18 to 28, then stops all investing for the next 30 years.
Meanwhile, Investor B invests $2,500/year from age 18 to 58.
Both invested $100,000 total by age 58.
However, thanks to the magic of compounding, Investor A ends up with $1,182,470.57 while Investor B ends up with $551,542.64 — putting Investor A’s investments at over twice Investor B’s.
Building good habits
Habits take time to build, but the longer you practice them, the more they become second nature.
Starting your investing efforts early cements several good personal finance habits early in life that pay off later.
Some of these habits include:
- Setting money aside — You get used to putting some earnings into investments before anything else, especially if you use an auto-transfer feature.
- Watching spending — Cutting unnecessary spending provides more money for investments and building wealth.
- Letting your investments go — You build the habit of not checking your portfolio constantly and getting worried over price drops, especially if you don’t need the money for decades.
- Monitoring your investments — At the same time, you learn to check in every so often to adjust your portfolio to stay on track with your investment plan and goals.
Money isn’t the only thing that compounds — so does knowledge.
If you start investing at age 18, you give yourself as much time as possible to learn markets and investing.
You can read books and blogs if you want to understand the market’s intricacies. While not mandatory to build wealth, this could help you create a better investment strategy.
You also have time to learn from your mistakes and deal with the swings of the market.
If you make a mistake that loses you money, you have more time to earn it back. As you get older, you’ll be able to stomach those times when the market drops.
Ultimately, you’ll feel more empowered to take your finances into your own hands as an adult.
Risk tolerance and time horizon
The older you get, the more financial commitments you tend to accumulate.
For example, losing money in the markets at age 40 could mean missing a mortgage or car payment.
Additionally, many young adults won’t need their investments back for longer. If you have a retirement account, such as an IRA, you probably won’t have to touch the money for several decades.
Thus, a younger investor tends to have a longer time horizon and risk tolerance — in other words, a longer time before needing the money and a greater willingness to choose riskier investments.
More risk generally means higher return potential, too. Young people can take calculated risks on more volatile investments that could offer higher potential returns.
How to Start Investing at Age 18
The benefits of investing early are clear.
The question is: how to start, and how do you invest?
There is no one winning investment strategy — the key is to know your goals and understand what you buy,
That said, here are some tips for getting started.
Learn the types of investments
First and foremost, you should gain a basic understanding of the different types of investments.
Here are some of the key types to know:
- Stocks: You buy shares of individual stocks, which are small slices of a company, in the stock market. These sometimes pay dividends, a form of investment income.
- Bonds: Bonds are debts issued by federal, state, and local governments as well as corporations. They pay you interest generally every six months. They’re considered less risky than stocks in many cases but don’t grow in value as much.
- Mutual funds: A mutual fund involves several individual investors pooling money to invest in a range of stocks, bonds, and/or other assets. These are run by a fund manager who buys and sells assets to try to maximize your returns.
- Index funds: An index fund is a mutual fund that follows an index, like the S&P 500. They’re passive — the fund manager only buys and sells assets to match the index.
- ETFs: You can buy and sell exchange traded fund shares like stocks. However, an ETF is also like a mutual fund in that they consist of groups of stocks, bonds, or other assets.
If you don’t have much money to invest, some brokers let you buy fractional shares of stocks and ETFs. For example, you might buy half a share of a stock instead of a whole share.
There are also alternative investments, such as:
- Real estate
- Precious metals
You probably won’t get into these until later in life — they’re a little more complex and aren’t always as accessible in an investment portfolio.
It’s good to know there are these other options out there, but we wouldn’t recommend diving into them without doing your research first or working with a trusted financial advisor.
While you could technically open a checking or savings account to put your money in, this isn’t really considered “investing” as the interest rates tend to be so low they may not even offset inflation.
Diversify your portfolio
Diversification means spreading your investments across numerous asset classes or types.
The theory is if one asset or sector decreases in value, it won’t destroy your portfolio.
Some markets actually tend to increase specifically when others decrease. A classic example is the relationship between the stock and gold markets. When stocks drop, gold tends to go up and vice-versa.
You can diversify within asset classes, such as picking stocks in different industries or of different company sizes.
You can diversify across asset classes, too. That might involve holding a mix of stocks, bonds, and mutual funds instead of just stocks.
Platforms like Earlybird offer pre-built diversified portfolios to suit several investment goals.
When you’re just starting, it’s much easier to invest in these than pick investments on your own.
You won’t have to worry about buying and selling individual investments to keep your desired portfolio allocation.
Be wary about “hyped” investments
You may have heard the news about “meme stocks,” cryptocurrencies like Bitcoin and Dogecoin, and derivatives like futures or options.
It’s tempting to get into these assets to be part of the trend, but these investments tend to be volatile and risky.
Some end up being complete scams — especially in the crypto world.
It’s also important that, scam or not, you can lose money in the markets.
This isn’t to say that these types of assets are never good investments.
However, always do your research, understand what you’re buying, and make sure it fits your strategy and goals. Avoid buying investments just for hype or because you’re hearing news stories about people suddenly making a lot of money.
Make it a habit
Remember earlier how we said that investing while young cements good habits?
You can make this easier by setting up auto transfers to your investment account. Offered by most brokers, this lets you automatically move money to your investment account regularly.
These add up, thanks to compounding and time. You’ll build great habits and potentially a large investment account through consistent transfers.
Can You Start Investing Before Age 18?
People under 18 can’t start investing alone. The law requires investors to be at least 18 and 21 in some states.
However, there’s a simple and completely legal way around this rule: opening a custodial account.
Custodial accounts like those that EarlyBird offers are special investment accounts opened by a parent, guardian, or other trusted adult in a child’s name.
Legally, the minor can’t place trades or contact the broker to do so. However, they can pick asset allocation and investments with their trusted adult’s help — the adult then deposits the money and ensures it’s allocated correctly.
Additionally, parents, guardians, and relatives can gift up to $15,000 to the account tax-free for 2020.
Once a minor turns 18 or 21 — depending on their state — the account becomes theirs to manage. Then they can buy and sell investments at their leisure.
Given the benefits of investing at 18, starting earlier can benefit you even more.
It’s Never Too Early to Start Investing
Spending every penny you earn when you’re young is tempting, but investing at 18 or even earlier puts you far ahead of the game later in life.
You could potentially grow your investments much more, and you’ll have a better understanding of the financial system.
If you’re under 18 but want a head start on building wealth (or you’re a loved one who wants to start their child on the right foot), Early Bird can help.
We offer custodial accounts to help minors secure their financial future. Download the Early Bird app today to learn more.
This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.