By: Dannie Phan | October 12th, 2020

When you’re young, you’re often caught up thinking about your first job, first crush and life after your high school graduation. Your plans for the future can be vast and complex – but you’ll want to lay the groundwork to achieve them while you still have the time.

That’s where the matter of investing comes into play. As a teenager, you have the option to invest your money in stocks, ETFs, CDs, IRAs and other types of investments as long as you have a guardian to help you do so. As you spread your money in this way, you can start to earn back interest. This means that not only will you have enough money on hand to go out on the weekends, but you can also prepare yourself for the expenses of college or any of the other ambitions that you may want to try and take on in the years to come.

How Do I Start Investing As A Teenager?

Note that there are some roadblocks that can keep teenagers from investing. For example, most brokerage accounts require that their user be at least 18 years old to start investing. Of course, you can collaborate with a parent to open up a custodial account that’s run by a parent to get experience with personal finance. These kinds of accounts allow you to take on responsibility for your investment account once you reach a certain age, be that 18 or 21, depending on the rules of your state. Until then, you can let a parent or other guardian know what you would like to do with the money you want to invest, and they can manage those investments for you.

All About Custodial Accounts

As mentioned, you’ll want to work with a parent or another attending guardian to open a custodial account with the brokerage app or program you’re most interested in using. In doing so, you can gift money into your account while the guardian of legal age manages your trades.

As a teenager, you will not be able to contact account brokers or process these trades on your own due to state laws. However, that does not mean it is illegal for you to be investing your money. In fact, many brokerage apps, in light of the 2020 pandemic and market crash, encourage younger investors, as the investing process allows teenagers just finding their footing in the world to start saving up, even when jobs are scarce.

Again, when you do reach legal age in your state, the ownership of your custodial account will transfer to you, and you’ll be able to manage your investments as you see fit.

Some of the best brokerage apps allowing custodial accounts include:

  • E*Trade
  • Ameritrade
  • Charles Schwab

Investing Soundly: Tips And Trips

Once you set up a custodial account, you’ll want to do what you can to use your investing money to the best of your ability. This means creating a diversified custodial account with many different avenues through which you can invest.

Some of the most straightforward ways to diversify your portfolio as a teenager include: 

  • Establishing stock investments – The stock market may be a temperamental beast, but that doesn’t mean you can’t come to better understand it in time. Young people with a custodial account in place, you can start investing a bit of your money into businesses that you anticipate will do well in the months and years to come. In doing so, you will own a small percentage of the company. With that ownership comes the occasional cash distribution. You can even eventually sell your stock for more than you invested, netting revenue when you didn’t have to do a thing.
  • Connect with low-cost mutual funds – If you want to diversify your outreach further, you can alternatively invest in low-cost mutual funds. These funds bring together stocks from multiple organizations and allow you to benefit from the collective gains. As you might suspect, this allows you to protect your investments and lose less money in a stock market dip.

Custodial Accounts Versus High-Yield Savings Accounts

If your parent or guardian appears reluctant to take on the responsibility of a custodial account for you, you can instead opt for a high-yield savings account. Your funds won’t be as flexible in this type of account, but you’ll still be able to benefit from your account’s generation of compound interest.

If you’re feeling adventurous, you can even swap out an account with a physical bank in favor of one with an online bank. These online-only banks can often offer you interest rates on high-yield savings accounts that are 20 times as lucrative as those offered by standing banks.

Some of the safest online bank accounts to work with if you want to open a high-yield savings account include: 

  • Radius Bank
  • Betterment
  • CIT Bank

What Should I Invest In As A Teenager?

It can be difficult to plan for the future when everything feels so immediate and raw. However, if you’re a teenager interested in investing, there are some steps you’ll likely want to take to make a better future for yourself.

As such, consider investing in a custodial Roth IRA when you’re young. Much like traditional IRAs, these accounts help you prepare for life after retirement – and you can contribute and remove money from them without incurring a tax.

Of course, you can also invest in stocks or low-cost mutual funds at the same time as you start to build up a CD or an IRA. Some of the safest stock growers include but are not limited to: 

  • Target
  • Nexstar Media Group
  • Walmart
  • Alphabet
  • Healthpeak Properties
  • Apple
  • Disney
  • Facebook
  • Medifast
  • Alibaba Group Holding

You can, of course, choose to invest in a startup instead of one of the more established corporations on the stock market. Note that these high-risk, high-reward investments can be more difficult to manage than those placed with companies that have been established for decades.

How Can A Teenager Manage Their Money?

If you want to forgo the world of stocks and high-yield savings accounts entirely, you do still have options available to you that can allow you to put money into your savings. For example, you can use a microsavings app. This app can round up the purchases you make in stores and deliver that extra money into your savings account.

Put another way: Say you go to high school football games every Friday. You have to spend money to purchase tickets and to get a snack during halftime. A microsavings app can round up the cost of those purchases and put the cents you didn’t spend into your savings account. While this may not translate to a significant sum of money in the immediate moment, you may find yourself putting a more away than you expect to over time.

Investing And Taxes

Of course, if you are under the age of 18 and have a custodial account in place, your earnings are not tax-exempt. There are exceptions that apply to those younger parties investing in the stock trade, but in general, you’ll have to abide by the following rules:

  • The first $1,050 you make investing in the stock market will not be taxed if you are under 19 years old.
  • After you make your first $1,050, you will be charged 10% in taxes on the next $1,050 you make.
  • If you generate more than $2,100 with your stocks, your income outside of that which you have already been taxed for will be taxed on the marginal tax rate of the parent affiliated with the account.

Taxes, unfortunately, are an inevitable cost you’ll have to consider not only when investing but when doing just about anything in life. As such, don’t let the rules above prevent you from exploring your investment options. Instead, keep them in mind and remember the importance of acknowledging them when tax season comes around. If nothing else, the parent or guardian you have affiliated with your custodial account can help you better understand how to go about attending to your new income.

Investing may not be the first thing on every young adult’s mind, but why shouldn’t it be? A teenager who is given the opportunity to invest her first paycheck can watch those funds grow over the next several years. This way, she can be better prepared for the expenses the future may throw at her.

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