THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE SEE MY DISCLOSURES. FOR MORE INFORMATION.
If you’re a teenager or a parent of one, it’s never too early to start thinking about money.
In fact, the sooner you start learning about financial concepts, the better off you’ll be in the future.
Now the world of investing can be confusing and overwhelming to many new investors, with many different types of investments to choose from.
In this post, I’ll walk you through the best investments for teens and show you the reasons why you want to start learning about money now.
Hint, it has a lot more to do than just money.
Table of Contents
9 Investments For Teens To Start Learning About Money
#1. High-Yield Savings Accounts
This is a classic tool and a great first step for teaching kids about money.
If you are a teenager and don’t have a savings account yet, this is your very first priority.
But since you can’t be the sole account owner because you are still a minor, you need to open an UTMA or UGMA account.
This basically has your parent or other legal guardian have ownership with you and then when you are old enough to have your own account, they can be removed.
While a savings account won’t make you rich off the interest you earn, it does teach you the valuable concepts of saving money and compound interest.
Developing the habit at a young age of always putting money away is a great habit to have. It teaches you to be patient and not needing to have everything right away.
And this habit spills out into every other area of your life as well.
As for compound interest, this is the money you earn on your savings.
I’ll go into more detail about this topic later, just know that when you put money in a bank account, the bank pays you money as a result.
If you don’t have a savings account, below are some great options to consider.
#2. Certificate Of Deposit
A certificate of deposit or CD, functions very much like a savings account.
The biggest difference is that instead of being able to withdraw your money whenever you want, with a CD, you lock your money up for a period of time.
The benefit of not being able to access your cash for a longer time is that you are paid a higher interest rate.
Typical term lengths of bank certificates of deposit are 6 months, 12 months, 18 months, 24 months, 36, months, 48 months, and 60 months.
Note that even though you lock your money up, you can still withdraw it if you want.
In most cases, you will simply forfeit a portion of the interest you earned as a penalty.
As with a savings account, a CD is a low risk option that teaches the value of saving money and compounding interest.
#3. Mutual Funds
Mutual funds are a great way to get introduced to the stock market.
- Read now: Here are basics of mutual funds to know
They are commonly called a basket of stocks because when you buy a share in a mutual fund, you are buying a fraction of a share of thousands of companies.
Another way to look at it is with crayons.
Instead of buying a blue crayon, a red crayon, and a green crayon separately, you could instead buy the box of 64 crayons and have all the colors you need.
This is an advantage since most teens don’t have a lot of money to invest.
So by investing in a mutual fund, you are instantly diversified, lowering your overall risk.
#4. Exchange Traded Funds
Exchange traded funds, or ETFs function very similarly to a mutual fund.
The biggest difference is that most ETFs are index funds.
This means their goal is to earn the same return as the underlying market they are tracking.
For example, an S&P 500 ETF will try to earn the same return as the S&P 500 Index.
One advantage here is that the fee to invest in an ETF is lower than a mutual fund.
Because of this, more of your money stays invested, which means it can grow into larger amounts in the years to come.
#5. Stock Market
Investing in the stock market or individual stocks is another option for teens.
This strategy is riskier because you are putting all of your money into one stock.
If the company does poorly, the stock will lose value and you will lose money.
The other issue is you tend to need more money to invest in individual stocks.
- Read now: Learn how to become a stock market millionaire
- Read now: Here are the investment terms you need to know
With a mutual fund, there is a low initial investment, say $100.
This allows to buy thousands of different company’s stock at once.
But with stocks, for $100 you might be able to own 1 share of 2 or 3 companies.
The advantage of this kind of investments is that you can invest in your favorite companies, making investing more fun and exciting.
#6. Roth IRA
A Roth IRA is an individual retirement account and could arguably be the best way for teens to invest.
- Read now: Here are the pros and cons of Roth IRAs
This is because the money grows tax free until you withdraw it in retirement.
Since you are a teen, this means you can invest for over 50 years without tax consequences.
The downside is you need to have earned income to invest, so you need to have a part-time job.
But this issue isn’t a big deal when you see that many people call a Roth IRA for teens a millionaire account.
The reason for this is because with an average return of 8% annually, if you invest $25,000 during your teen years, you will have over $1 million dollars by the time you retire.
This financial independence is why so many parents encourage young adults to start investing in a Roth IRA as soon as possible.
It is one of the best investment decisions you will ever make.
#7. Real Estate
A great alternative to the stock market is real estate.
While most real estate doesn’t appreciate in value the ways stocks do, it is a consistent return that rarely loses value.
There are many options when it comes to investing in real estate.
You could invest in REITs, also called real estate investment trusts.
Another option is to buy a house and rent it out to either a long term tenant or use short term rentals like Airbnb.
Or you could crowdfund real estate purchases.
Looking for an easy way to get started investing in real estate without a lot of money? Look into Arrived Homes. Pick the single family houses in the parts of the country you want to invest in and earn passive income.
No matter which option you choose, real estate is a great alternative to invest in.
Starting a business is a great way to invest.
In fact having your own business is a great way to build wealth.
Not only do you earn an income, but you get many tax breaks too.
Of course, starting a business isn’t a simple thing, so this idea isn’t for everyone.
But it is a smart way to get started investing.
Bonds are debt securities issued by corporations and governments.
They typically return less than stocks do, but they don’t fluctuate in value as much either.
This makes them a safer alternative to stocks.
In fact, most investors have a combination of both stocks and bonds in their portfolio for these reasons.
The best way to invest in bonds is through mutual fund or exchange traded fund.
When Teens Should Begin Investing
When is the best time for teens to begin investing?
The simple answer is now.
This is because the sooner they start investing, the more time compound interest has to work its magic.
- Read now: Learn the power of compound interest
Let’s look at a simple example.
Bob is 13 and invests $2,000 a year for 4 years into an investment account.
The money grows at 8% annually until he is 65 years old.
At that time, his account is worth over $375,000.
Now you have Ken.
He waits until he is 25 years old to start investing.
He invests $20,000 and earns 8% annually and let’s it grow until he is 65 years old.
Ken ends up with $93,000.
Ken invested $12,000 more than Bob and still ended up with close to $282,000 less!
This is why the sooner a teenager can begin investing, they should.
Why Teens Should Start Investing
There are many reasons why a teenager should start investing.
Here are the biggest ones to consider.
#1. Learn About Personal Finances
Hands down the biggest benefit about learning to invest is that it is a key part of personal finance.
The sooner you learn how to manage your money, the better off your finances will be, both now and in the future.
And having money saved makes life a lot less stressful.
When you have money, you aren’t worry about how you will pay your bills or if you can afford something.
Without this major stress, life is more enjoyable.
#2. Take Advantage Of Compound Interest
A close second to the above point is compound interest.
This is the money you earn when you save and invest your cash.
Depending on the riskiness of the investment, you will earn a stated interest rate.
The riskier an investment, the higher the potential return.
The less risky, the lower the return.
Since a bank savings account carries little to no risk, you get paid a very small amount of interest.
And because the stock market is riskier, you get paid a higher return.
As I showed you in a previous example, the sooner you can take advantage of compound interest, the better, as it has more time to grow your wealth.
#3. Pay For College
One of the biggest expenses a person will have in their lifetime is college.
But if you start investing when you are young, it won’t seem as daunting.
In fact, if you invest wisely, you will have a huge advantage because you will enough money saved up to cover a good chunk of your college expenses.
Think about graduating college with little or no debt and the freedom that comes with it.
#4. Get Ahead Financially
Another benefit to investing when you are young is you get ahead financially.
Most people put off saving for retirement for later.
But when later comes and they want to start saving, they find there isn’t a lot of money there to put away.
This is because they now have a mortgage, a car payment, maybe even kids.
By starting early, say even in high school, you can reduce or even stop saving for retirement and still end up with a lot of money.
The same idea applies to investing in general.
The sooner you start, the more money you will have for a down payment on a house or for other financial goals you might have.
#5. More Choices In Life
Finally, when you have money, you have more freedom in life.
Maybe you find you don’t like your career.
But the job you want pays a lot less and you can’t afford to take the pay cut.
The solution is to work a job you hate.
If you had money saved, you might be able to afford to get paid less and still survive financially.
Or maybe you have kids and realize you don’t want to go back to work until they are older.
If you had been saving and investing before you had children, this could very well be a reality for you.
At the end of the day, having money saved opens a lot of doors in life that otherwise wouldn’t open.
Best Brokers For Teen Investors
The biggest challenge when it comes to investing as a teenager is the fact you are a minor.
This means you have to jump through some extra hoops to open a brokerage account.
Since you can’t be the sole owner as you are under 18 years of age, you need to open a custodial account with a parent.
The good news is that once you reach the age of majority in your state, you can convert this to an individual account all your own.
With that out of the way, what are the best brokerage firms for teenagers?
It all comes down to how you want to invest.
If you want to trade stocks, then Webull is a great open.
They offer free trades and a lot of research and educational support.
You can even use a paper trading account to understand investing more before risking any real money.
Another option if you plan on invested more longer term is M1 Finance.
They allow you to invest in individual stocks or ETFs without fees.
You can build your own custom portfolio, or you can select one of their pre-built ones.
M1 Finance broke the chains when it was the first to offer free stock trading. Even as other brokers come onto the scene, M1 Finance is one of the best choices for DIY investors looking to invest.
You can even set up to have your dividends reinvest to grow your wealth more.
Even better, you can take advantage of fractional share trading and invest a small amount of money.
Finally, if you are looking to invest in alternative investments, take the quiz below to find the right broker for you.
There are the best investments for teens to start learning about money and reaching your long-term goals.
The most important thing is you start your investing journey now.
Because the sooner you start, the more time your money has to grow.
And the more it grows, the more options you will have in life down the road.
- Read now: Discover how to build wealth in your 20s
- Read now: Here are Jack Bogle’s investing rules for success
- Read now: Discover the best Warren Buffett quotes
I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.