Investing is an effective way to start preparing for the future and saving for financial goals. And while many of us don’t take the leap into investing until adulthood, it’s never too early to begin.
You can help your teen start investing the money they earn at a part-time job or money that’s gifted from you and other family and friends.
Investing in your teen can help them start preparing for their future early by setting aside money for college and future financial goals. And as a bonus, it will teach your child financial literacy that will come in handy throughout their entire lives.
In this article, you’ll learn why to start investing for your teen, some of the challenges you might run into, and how to start now.
Why Start Investing For Teens
When it comes to saving for your child or giving a monetary gift to a loved one, you might wonder why investing is the way to go.
After all, it can be tempting to simply gift cash to a teen that they can use now. And it can certainly seem easier to put money into a local bank account where it’s easily accessible.
Here are two fundamental reasons why investing for teens is the right path.
Save for future goals
The teens in your life are going to face many financial burdens over the next decade.
Many teens hope to attend college in a time when more people than ever are leaving school saddled with student loans. They may also wish to travel, buy a home, start a business, or follow some other dream that requires them to have money in the bank.
Investing for your children or the children in your life not only allows you to meaningfully contribute to those future goals, but it also allows time for the money to grow thanks to compound interest.
The US Securities and Exchange Commission reports that the stock market sees average annual returns of 10%. As a result, every $100 that you invest for your loved one today has the potential to grow to more than $250 ten years from now.
Teaches teens about finances
Not only does investing for teens help them to financially prepare for the future, but it also teaches them about finances.
Since schools don’t often teach basic financial skills to children, it’s up to parents and other loved ones to take on that task.
When you start investing with your teen early, they learn lessons and habits that will stick with them forever.
They’ll learn how investing works, a skill that many people never learn. They’ll also learn how to budget effectively.
As your teen starts earning money of their own, you can walk them through the process of deciding how much to invest versus how much to set aside for personal expenses.
Ultimately, this financial literacy is one of the greatest gifts you can give to the teens and other young people in your life.
The Challenges of Investing As a Teen
Investing for a young person in your life is a great way to meaningfully contribute to their future.
But you’ll quickly learn that there are a few more roadblocks for investing as a teen than there are for adults.
Brokerage firms generally require that someone be at least 18 years of age to open a brokerage account. This is when they can legally enter into a contract.
Another challenge that teens face when it comes to investing is a lack of knowledge and experience. Schools rarely teach this type of education, and a teen investing on their own would likely be in over their head.
As a parent or loved one, you can take the lead to help educate your teen about investing while helping them to grow a nest egg from a young age.
Parents and other loved ones who wish to invest for a teen will have to look into one of the account types specifically designed for investing for minors. Not only can they start investing before the teen turns 18, but they can use it as a learning opportunity to guide them.
How to Start Investing For Teens
You may have decided to start investing for a teen in your life to help them reach their future goals. There are several investment options available to you.
A custodial account is a type of investment account that a parent or other adult sets up for a child in their life.
The adult maintains control of the account until the child reaches adulthood, but the assets in the account legally belong to the child. The adult can’t withdraw money except in special circumstances when the custodian uses the money for the benefit of the child.
There are two types of custodial accounts:
A Uniform Gift to Minors Act (UGMA) account can be used for financial assets such as individual stocks, bonds, mutual funds, index funds, cash, and insurance policies.
A Uniform Transfer to Minors Act (UTMA) account can be used for just about any type of asset. It can hold the financial assets that an UGMA can, as well as other assets such as real estate.
The two types of accounts are otherwise very similar. Which account you’re eligible for depends on the state in which you live.
EarlyBird is an UGMA account that makes it especially easy for families to save for a child’s future. A parent or another loved one can set up the account, and then any of the child’s loved ones can contribute.
When the account is created, the custodian can choose between five different ETF portfolios ranging from conservative to aggressive. Custodians can also choose to allocate up to 5% of the account to values-based funds, such as those that promote environmental protection or diversity.
This option provides a unique opportunity for families to teach teens about the importance of investing according to their values.
Custodial accounts like the one you can open with EarlyBird provides the most flexible way to invest for a teen in your life. The teen gets to take ownership of the account when they reach adulthood, and they can use the money for any goal that’s important to them.
A 529 plan is an account that helps families to save for college in a tax-advantaged way. With this type of account, parents and other loved ones can contribute to the young investor’s life.
The account owners can choose a specific portfolio to invest the money in. Then, when the child heads off to college or another form of higher education, they can use the money in the 529 plan to pay for their education-related expenses.
The biggest perk of 529 plans is the tax benefits.
Many states allow people to deduct their contributions to 529 plans on their state income tax return. The money in the account also grows tax-free. And as long as they spend the money on education expenses, they can withdraw it tax-free.
While 529 plans do have some perks, they’re also quite restrictive.
It’s impossible to know when your child is young if they’ll wish to attend college. And if they spend the money on anything else, you can expect to pay penalties and taxes on that money. Because of these restrictions, a 529 plan isn’t an effective tool to help a child invest for other goals.
A custodial individual retirement account (IRA) is a type of retirement account that a parent or other adult opens for a child in their life. Once the child reaches adulthood, ownership of the account is transferred to them.
Contributions can be made to a child’s custodial IRA as long as that child has earned income. As many people get their first part-time job as a teen, this age could be an ideal time to open such an account.
IRA’s come in two forms: traditional and Roth. Both have tax advantages, but the tax advantage comes at a different time for each. Contributions to a traditional IRA are tax-deductible, and then account holders pay taxes on the money as they withdraw it during retirement.
With a Roth IRA, contributors pay taxes on the money before it goes into the IRA. Then the funds grow and can be withdrawn tax-free during retirement.
While saving for retirement starting at a young age can be useful, there are a few considerations to know before choosing this type of account:
- The child must have earned income to contribute to an IRA. Others can contribute to the account on the child’s behalf, but only up to the annual limit of $6,000 or the amount of income the child earned during the year, whichever is lower.
- The money in an IRA is for retirement. People can’t generally withdraw money until the age of 59 ½ without paying considerable taxes on them. As a result, an IRA isn’t the most effective to help a teen in your life prepare for other goals they hope to achieve in their life.
A variety of banking products can help individuals to set aside money for the future and see modest growth.
The FDIC (Federal Deposit Insurance Corporation) insures accounts such as savings accounts, money market accounts, and certificates of deposit (CDs) up to a set amount, meaning your money is safe.
But these accounts also come with significantly lower returns than the other investment accounts we’ve discussed. When interest rates are low, you can expect the return on these products to be less than 1%.
The one benefit of these accounts is that they can be helpful for short-term savings or money you expect to need for the child shortly.
You might decide to pair one of these banking products with another investment account to simultaneously save for your teen’s short-term and long-term goals.
How to choose the right investment
It can be easy to become overwhelmed when choosing the right investment tool for the teen in your life.
Each option has its advantages. But a custodial account like the one you get with EarlyBird provides more growth potential than a savings account, but with the flexibility that’s lacking from a retirement account or 529 plan.
Where to Get Money For Investing for Teens
Investing for the teens in your life can be a collaborative effort between the parents, other loved ones, and even the teen themselves. EarlyBird makes it easy for anyone to contribute to a child’s UGMA account in just a few quick steps.
Not only does this result in more money saved for the child’s future, but it also gets everyone excited about and emotionally invested in that child’s future goals.
By the time they reach their teen years, many people are picking up their first part-time job, whether in a family business or at another local establishment.
This job empowers teens with a new level of freedom — the freedom to provide for themselves at some level and save for their future.
But a part-time job is also a great way to start teaching your child about finances.
Not only can you teach them the basics of opening a bank account and balancing a budget, but you can also get them involved in investing.
Invite your child to contribute a percentage of the earnings from the job, and they’ll learn a valuable lesson about finance as they watch it grow over time.
Parents work hard to help prepare their children for the future, both emotionally and financially.
One effective way you can do this is by creating a line-item in your monthly budget to make regular contributions to your child’s investment account.
By using EarlyBird to invest for your child, each monetary gift can be accompanied by a personalized video. When your child reaches adulthood and takes ownership of the account, they’ll love watching your videos from over the years.
Friends and family gifts
For other loved ones who want to financially contribute to a child’s future, investing on their behalf is a great way to do that.
Not only is a gift meaningful in and of itself, but giving an investment means that your gift will grow even greater over time.
When friends and family gift cash to teens, parents can invest it into the child’s account. But EarlyBird makes it easy for loved ones to invest directly.
The EarlyBird platform allows anyone to contribute funds to a child’s UGMA account. With the app, contributors can also leave a video message, making the gift more personalized and timeless.
Many parents begin giving their children a regular allowance at a young age. While allowance often serves as an opportunity for kids to have a bit of spending money or reward them for chores, it can also serve as a learning opportunity.
Parents may decide to use their child’s allowance to teach them the importance of saving from a young age.
You can make a deal with their child that you’ll provide a weekly allowance, but a certain percentage of it must go into savings. By opting for an investment account, you’ll have a jump start on teaching your child about investing.
Considerations for Investing for Teens
Investing for teens — or children of any age, for that matter — is a great way to make a meaningful contribution to their future goals. But before you get started, there are a few factors you should know.
There are a variety of tax consequences that come with investing. It’s important to be aware of these before you get started.
- When you gift money to a child in your life, you may have to file a gift tax return. The IRS doesn’t require individuals to file a gift tax return until they’ve given more than $15,000 to a single recipient in a year. Anything over that amount counts against your lifetime exclusion of $11.7M. It’s not until you reach your lifetime exclusion that you’ll actually have to pay gift taxes.
- Depending on the type of investment account you use, there may be taxes on the earnings. In the case of a custodial account, the first $2,200 of annual earnings are tax-free. After that, earnings will be taxed at the child’s tax rate.
Time horizon and risk
When making investment decisions for your teen, it’s important to consider the time horizon and your risk tolerance. Time horizon refers to how many years before your teen will need the money. The US Securities and Exchange Commission (SEC) recommends that the shorter your time horizon, the less risk you take on with your investments.
Your risk tolerance refers to your comfort level with the possibility of losing some of your investment, either temporarily or permanently.
EarlyBird makes it easy to invest for any time horizon or risk tolerance. Because the five portfolios vary by risk level, it’s easy to choose the one that best matches your teen’s needs.
The SEC also recommends that investors diversify their portfolios. In other words, they advise against putting all of your eggs in one basket.
An investor can diversify in two different ways.
First, they can diversify within an asset class. For example, rather than investing in the stock of just one company, you spread your money out across many companies.
The other type of diversification occurs across asset classes. In this case, rather than putting all of your money into stocks, you’d put some into stocks, bonds, cash, etc.
EarlyBird makes it easy to diversify your portfolio.
There’s one portfolio that’s entirely bond-based and one that’s entirely stock-based, spread across different companies and markets. The other EarlyBird portfolios diversify even further by providing a combination of stocks and bonds.
There are many benefits to getting teens started with investing early. It teaches critical financial lessons that they may not otherwise learn until later in life.
It also helps them to start saving for financial goals such as their first house, a big move, an unpaid internship, or launching their own business.
Remember that it’s never too early to start investing for your child.
Even if your child hasn’t reached their teen years yet, EarlyBird empowers people to start investing for the children in their lives as early as birth.
EarlyBird offers tools that can help your child get started with saving for the future and give friends and family the opportunity to join in. Download EarlyBird on the app store today to start investing in the kids you love.
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.