Investing for teens could be quite vague due to lack of experience, therefore, many wonder or if they should at all. However, by investing now rather than waiting till you are older you can prepare your finances for a safe landing. Basically, investing gives you a better advantage over your peers. The knowledge you gain and the potential returns will give you a good headstart into adulthood. Here’s everything you need to know about investing for kids.
What is investing for teens all about?
Investing is the act of allotting money with the hope of generating potential returns. In simpler terms, investing is allocating money in order to gain more money. A teenager who starts investing will be better prepared financially for adulthood. Basically, investing early helps you to develop a long term mindset. Having a long term mindset is very crucial for managing money effectively.
What should a teenager do before investing?
As a teen who wants to invest, you can only succeed by overcoming a barrier. The major barrier to investing successfully is the impulsive buying of trivial things. Most teens struggle with impulsive buying and overspending. This is because they prefer to spend money on their wants rather than on their needs. You need to learn how to control your spending habits to succeed at investing. A good way to control your spending is by being accountable to your parents or guardian.
What should I invest in as a teenager?
There are several investments available for you to choose from. However, you must note that all investments come with a level of risks. Here are some common investments for teens and their downsides:
1. A high-yield savings account
Having a high-yield savings account is the most basic way for you to generate returns on your money. The term ‘savings account’ is not new to everyone. However, many financial institutions now offer the option of a high yield savings account.
This type of account offers you a higher interest rate than a standard savings account. Having a higher interest rate will help your money to grow faster than it would in a conventional savings account.
The downside of this investment is that it has a low rate of return compared to other investments opportunities. Read more on the similarities between savings and investments.
2. Certificate of deposit (CD)
Certificates of deposits, also known as a fixed deposit is a special kind of savings account. Basically, the difference is that fixed deposits require you to keep your funds in the account for a specific duration. This duration can range from months to years. Thereafter, you will receive your money back as well as interest on your funds. It is another good way to invest your money.
The downside of the CD is that the financial institution will retain your funds for a long period of time.
Purchasing Bonds is just like lending money to a company or the government. Usually, the borrower pays you back with interest. Bonds are a more stable type of investment. This is because they help you to create a diversified investment portfolio. Additionally, they provide you with a fixed income because of the interest your capital incurs.
A stock is simply a share. Buying stocks in a company makes you a shareholder in that company. You can make money from dividends that companies pay to their shareholders at regular intervals. Also, you can earn through capital gains when the stock value increases.
The downside of investing in stocks is that it is very volatile. The value of stocks fluctuates frequently. Therefore, it is important not to build your investment portfolio solely on stocks.
Funds are investments that allow you to purchase different securities in one investment. The most popular types of funds are the Mutual fund and Exchange-Traded Funds (ETF). These funds are commonly known as pool funds because they bring together the money of various investors. Here’s a better definition of the two:
- Mutual Funds: A mutual fund is a type of investment fund that pools money from various investors to create a diversified portfolio m. Basically, each investor shares ownership of the fund and partakes in its profits and losses. At the end of the trading day, the company settles all mutual funds orders.
- Exchange-Traded Funds (ETFs): An ETF is a type of investment fund that allows investors to diversify their portfolios via a single investment. Unlike mutual funds, the investment company gives you more control over the price of every ETF you buy. Basically, you get instant access to a well-diversified portfolio at the end of the day.
The five investment opportunities above are great ways you can put your money to use.
Investing is a good way for teens to prepare well for adulthood. Not only will it increase your wealth, but it will also help you acquire good financial knowledge. Having good financial knowledge helps you manage your money effectively. Therefore, it is important to start investing your money as early as possible.
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