Contents
- Introduction
- Educate Them On Investing With A Roth IRA
- Allow Them To Try Out Index Funds
- Open A High-Interest Savings Account
- Try Their Hand In Stocks
- Conclusion
Introduction
Knowledge of investing does not simply come to you when you become an adult, so it is incredibly important to teach teenagers about this topic.
Unfortunately, it is not taught at school which is a real issue of mine and something I would love to change in the future.
So how can you teach your teenager about investing?
Educate Them On Investing With A Roth IRA
Setting up a Roth IRA is possibly one of the best ways for a teenager to gain an understanding of how the world of investing operates.
A teenager can only invest in a Roth IRA with post-tax income – teenagers must have a form of employment before they are eligible to invest in this type of IRA.
Due to the nature of the employment teenagers receive during high school, they usually receive a low tax rate, something which makes a Roth IRA the best method of investing for that age bracket.
Investment firms all have their minimums needed to open a Roth IRA – which means it is incredibly important to find the best option.
Vanguard has a minimum of $1000, whilst Fidelity requires $2500.
Investing as a teen provides tremendous returns in the long-term.
The longer the money has been sitting in that Roth IRA, the better the benefit will be to your teen in 15-20 years.
Allow Them To Try Out Index Funds
Teenagers can be very emotional human beings, when combined with the fluctuations of the market and the potential of their net worth dropping instantly, this can become worse.
Rather than investing in a single company and having their mood be dependent on the charts, encourage them to invest in index funds.
Your teenager will still be able to be exposed to their favourite companies such as Apple, Google and Nike, it just means they will not be bound by a single investment.
Studies have found that when it comes to investing as a teenager interest levels peak when professionals talk about brands they love and use.
This can have a huge difference on your teenager’s engagement levels when it comes to investing.
By putting half of your teenager’s money in index funds it will give them the exhilarating feel of trading without all the risk.
Open A High-Interest Savings Account
No understanding of the stock market or investing is needed when it comes to high-interest savings accounts.
Most banks require a minimum investment to open an account so ensure your teenager has the required funds before researching the best bank for them.
Whilst opening the account in the same bank as you have your money in might make sense, there are more sustainable options – especially for teenagers.
We suggest opening an account in an online bank which has two major drawcards against traditional financial institutions.
Online banks will more often than not offer higher interest rates as they do not require the extra funds to maintain any physical locations, wages, etc.
It is complicated to withdraw money from an online institution which can help your teen avoid impulse purchases, something which can interrupt their returns from the high-interest rate.
Try Their Hand In Stocks
Despite the risk, teenagers love the sound of investing in their favourite companies through the stock market.
It is incredibly important to teach them the process of research and due diligence before allowing them to invest.
Research is the difference between making it and breaking it as an investor and this should be one of the first lessons learnt by your teen.
Investing gives the investor a much greater sense of awareness to what is going on in the wider economy – a trait that will not only help your teenager as an investor but also with their academic pursuits.
Unfortunately, companies that your teenager will most likely want to invest in offer their shares on the higher end in terms of price.
An opportunity arises here to further educate them on saving methods and investing strategies such as value investing.
Value investing is great for teenagers who have limited funds as it is about finding undervalued stocks and sitting on them until the market realises their intrinsic value.
As the term undervalued suggests, these stocks will usually be on the cheaper side which will allow your teen to purchase a larger quantity, providing them with larger returns if the value increases in the future.
Conclusion
In conclusion, teaching your teenager about investing is crucial to their future financial independence.
There is never a better time than now to introduce them to the markets.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
