Have you ever thought about how much money you would have today if you had started investing back when you were a kid. Sadly, we can’t turn back time, but one thing that we can do is make sure to get our teens into investing and earning passive income before they even head off to college!
Not only will investing help encourage learning math, discipline, money management skills, it can also help your kid set up growing nest egg at a very young age. It’s also useful because it gives them the freedom to experiment (and possibly lose) now so that they can learn from their mistakes and become a successful investor later in life.
Here are the best ways to get your teenager started in investing:
- Teach them how to invest with a Roth IRA
One of the best first things to do if you are looking to get your child into investing is to set them up with a Roth IRA. The one great thing about Roth IRA is that you have to invest in one with after-tax income. That means that not only will your teen get a sense of what it means to invest, they will also have to have a job to open one.
The type of jobs that most teenagers hold during high school rates typically give them low tax rates. This makes a Roth IRA the perfect type of account to have in terms of teaching kids about saving for the future.
- Open a Savings Account for your Teenager
This may seem like a dumb topic to cover when discussing getting your child into investing, but you may want to think again. This is a great way to show them the value of investing and saving without having to deal with the possible anxieties of actually investing in the stock market.
Sure, it’s a bit of a training wheels technique, but what’s wrong with that?
One thing to absolutely keep in mind when it comes to opening a savings account is how it is typically not so easy to withdraw and transfer money. That will make sure that the money inside is safe from any impulse buys that your child might feel compelled to make.
- Allow them to dip their toes in the stock market
There’s certainly more risk investing in individual stocks rather than a portfolio holding index funds, but its absolutely a way to get your kid excited in investing. Many teens simply love the idea of investing in their favorite companies and owning a share.
Before you let your kid start investing, however, it is important to talk to them about researching stocks.
As you well know, investing offers investors a heightened and up-close sense of what is going on in the economy, what trends exist, and how to capitalize off of those trends. You need to stress that in order to really be a confident investor, you have to do your research beforehand almost as if you already own the stock.
One complication that you might run in with your kid is that the stocks they want to buy are also some of the most expensive as they are from the most popular brands. Instead of treating this like a hurdle, use it as a teachable moment. Talk to your teen about the important of saving money in order to make investment that they deem good decisions.
You can also use this as an opportunity to talk about diversifying and spending the same amount of money on multiple stocks as they would on one single share of one company.
- Encourage them to invest in a business
This is another great way to encourage your teen to invest. One major thing to look out for here is to make sure that you child isn’t at risk of being taken advantage of by some company that is simply looking to take advantage of people.
As you may very well know, investing in a business can be incredibly exciting and lucrative. Whether they decide to open their own business or have researched a local business that they are intrigued by, investing in a business makes the relationship far more personal and active. It’s a great way to have your teen learn about investing and business in a fast and fun way.
Brian at Ratebuddy.com has one thing to keep in mind when encouraging your child to invest in a business.
“The one roadblock here might be that many businesses require quite a bit of money to actually consider bringing on a new investor,” he said. “That doesn’t mean it’s impossible, just might be a little more involved.
“Make sure to keep a watchful eye over any potential transactions that could take place.”
- Introduce them to CDs
Certificates of Deposit are not as flashy as investing in the stock market and will likely not be as attractive to your teen, but they come with some serious benefits. First off, they are far less risky.
One aspect of CDs that makes them such a great investment option for teenagers is that the are FDIC insured. This will reduce a lot of the stress that you my feel about letting your child work with real money.
There are a lot of different terms that you can choose from when you are getting a CD. One thing to consider is that the longer terms will allow you to enjoy a higher rate on the money. This is a fantastic lesson to teach your teenager, especially if they are able to see how investing money for an extending period of time will earn them a larger return in the end, but taking out money early will force them to be penalized.
Since there are several different payment options you will be able to choose from when you decide to open a CD, your child will be able to feel like that have genuine control over their money. That lesson on its own is worth these exercises.
There are a lot of ways to help teach your child about responsible personal finances and investing and getting them involved in the stock market is a great way to go. That way, not only are they learning how to think and act like an adult, they are also preparing for their very bright future.