Author Topic: Investing as a teenager  (Read 7841 times)

csuino

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Investing as a teenager
« on: January 11, 2014, 08:03:31 PM »
Hello, I'm 16 years old and I would really like to start investing some money. I realize how important it is to start as early as possible, and I want to start off on the right foot. I've been doing most of my research lately on the stock market and came across the article on this site called "how to make money in the stock market". I am wondering if buying the Vangaurd total stock market index fund would be a good choice for someone like me. If not, what other things could I invest in. Also, what type of account would I open up on Vanagaurd (IRA, joint, individual, etc.). Thanks in advance

OperaAdam

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Re: Investing as a teenager
« Reply #1 on: January 11, 2014, 08:48:01 PM »
First off, I'm impressed that you're getting such an early start. I wish I had been a lot smarter about money when I was younger. Here's my two cents. The Vanguard Total Stock Market Index Fund is a great choice for someone young like you. You have many, many years to ride out the ups and downs of the market. Over the long term, stocks  tend to beat every other asset class out there.

As for the type of account, it depends on where your money is coming from. If you have a job where you get taxable income (whether or not you make enough to pay taxes), then you can open a Roth IRA and fund it. Assuming you don't pay taxes now, you would basically be getting that money tax free. This is probably the best option if it works for you.

On the other hand, if you're trying to invest your allowance money or something else that was given to you, then you'll probably have to get your parents to open a custodial account for you. It's acts like a regular brokerage account (i.e. the holdings are taxable), but your parents retain control (in name at least) of the money until you're 18 or 21 (depending on the state you live in). The assets are yours, but you can't "have" them until you're the right age. It can be a little complicated, but these can be a good option if you're working with a relatively modest amount of money.

_JT

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Re: Investing as a teenager
« Reply #2 on: January 11, 2014, 08:56:48 PM »
Vanguard index funds are a great start. The difficulty is that, to make money in the stock market (for those of us who aren't day traders, aka basically everyone), you need time. Years, or more accurately even decades. I'm 33 and it's cool seeing my balances grow from when I was 25. But as a 16 year old you might get frustrated with how slow the gains appear to be, if you're monitoring it on a daily basis or something.

So, make sure and learn about the beauty and wonder that is compound interest, and be patient with your investment.

Empire Business

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Re: Investing as a teenager
« Reply #3 on: January 11, 2014, 09:46:39 PM »
I too sure wish I had been more like you at your age.  Congrats on already being pretty awesome.

Like OperaAdam said, it will make a difference from whence the funds came that you wish to invest.  (Not directly, just whether you had earnings reported to the IRS of an amount greater than or equal to the amount you wish to invest.)

I wish you well in your endeavors!

csuino

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Re: Investing as a teenager
« Reply #4 on: January 11, 2014, 10:13:29 PM »
First off, I'm impressed that you're getting such an early start. I wish I had been a lot smarter about money when I was younger. Here's my two cents. The Vanguard Total Stock Market Index Fund is a great choice for someone young like you. You have many, many years to ride out the ups and downs of the market. Over the long term, stocks  tend to beat every other asset class out there.

As for the type of account, it depends on where your money is coming from. If you have a job where you get taxable income (whether or not you make enough to pay taxes), then you can open a Roth IRA and fund it. Assuming you don't pay taxes now, you would basically be getting that money tax free. This is probably the best option if it works for you.

On the other hand, if you're trying to invest your allowance money or something else that was given to you, then you'll probably have to get your parents to open a custodial account for you. It's acts like a regular brokerage account (i.e. the holdings are taxable), but your parents retain control (in name at least) of the money until you're 18 or 21 (depending on the state you live in). The assets are yours, but you can't "have" them until you're the right age. It can be a little complicated, but these can be a good option if you're working with a relatively modest amount of money.

Thanks, it sounds like the Roth IRA is what I'll do.

csuino

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Re: Investing as a teenager
« Reply #5 on: January 11, 2014, 10:17:14 PM »
I too sure wish I had been more like you at your age.  Congrats on already being pretty awesome.

Like OperaAdam said, it will make a difference from whence the funds came that you wish to invest.  (Not directly, just whether you had earnings reported to the IRS of an amount greater than or equal to the amount you wish to invest.)

I wish you well in your endeavors!

Thanks!

csuino

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Re: Investing as a teenager
« Reply #6 on: January 11, 2014, 10:19:18 PM »
Vanguard index funds are a great start. The difficulty is that, to make money in the stock market (for those of us who aren't day traders, aka basically everyone), you need time. Years, or more accurately even decades. I'm 33 and it's cool seeing my balances grow from when I was 25. But as a 16 year old you might get frustrated with how slow the gains appear to be, if you're monitoring it on a daily basis or something.

So, make sure and learn about the beauty and wonder that is compound interest, and be patient with your investment.

Yes the magic of compound interest amazes me. Thanks for the advice

Khan

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Re: Investing as a teenager
« Reply #7 on: January 11, 2014, 11:45:34 PM »
I... disagree with you investing.

The most important thing you could possibly do, is either go to college, or start working into a trade right out of highschool. Even going so far as not having a senior year of high school/starting community college at the same time. Increasing your earning power will help far more with whatever financial choices you make in the future instead of investing now.

Not only that, but unless you get a free ride in school and have no use for that money, you'd be best off not putting money into the stock market you'll -need- in <5 years.

csuino

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Re: Investing as a teenager
« Reply #8 on: January 12, 2014, 12:15:44 AM »
I... disagree with you investing.

The most important thing you could possibly do, is either go to college, or start working into a trade right out of highschool. Even going so far as not having a senior year of high school/starting community college at the same time. Increasing your earning power will help far more with whatever financial choices you make in the future instead of investing now.

Not only that, but unless you get a free ride in school and have no use for that money, you'd be best off not putting money into the stock market you'll -need- in <5 years.

I see your point. I do plan on going to a good college, so I guess I will have to think about this decision some more. Thanks for the advice

Emg03063

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Re: Investing as a teenager
« Reply #9 on: January 12, 2014, 12:01:42 PM »
If you didn't need the money for college, and the income was earned, from a financial perspective, a Roth IRA would be the right way to go, as the money would be tax free when you withdrew it in retirement.  If you anticipate being eligible for and using any sort of need based financial aid in college, one thing to keep in mind is that most aid formulas decrease your aid package by a fraction of your assets, effectively mitigating the benefit of your savings (unfortunate but true).  For this reason, it is sometimes considered advisable to leave your savings in the name of a trusted non-parent relative until you have graduated.  I'll leave it to others to debate the ethics of such a move.  Of course, there is the risk of the relative dying, losing your money or deciding not to return it.  If you have sufficient alternative means of financing your education and don't need to use this cash, Roth IRA is probably the best way to go.  I think a vanguard index fund is a fine way to get started.

curler

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Re: Investing as a teenager
« Reply #10 on: January 12, 2014, 07:43:08 PM »
From a financial aid perspective, putting money in a Roth IRA can be a good move.  Money in an IRA (whether the student's or the parent's) don't get counted as assets for federal financial aid purposes.

J

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Re: Investing as a teenager
« Reply #11 on: January 12, 2014, 10:40:05 PM »
The question I haven't seen anyone ask yet: what are your goals?  That's the biggest thing you need to ask yourself before you decide how to invest or spend your money.

For example, if you're starting early on saving for early retirement, you're probably pretty flexible on exactly when that happens, and thus you don't need to be particularly risk-averse; that then means you can weight your investing in index funds towards stocks rather than bonds.  If something goes wrong in the stock market, you can easily wait another couple of years to retire, and you'll still retire earlier than the vast majority of people.

If you're saving for some particular expense you anticipate in the future (e.g. moving out on your own, or purchasing your first car), that gives you a much shorter-term horizon for your investments, and you might want to choose something significantly safer and more risk-averse.

Since you're planning on going to college, you should definitely make sure you have enough saved for tuition and expenses during those years before almost any other type of savings.  You're in a position to avoid taking on any student debt.  However, just because you save for it, don't rule out the possibility of getting scholarships to pay for it instead, which frees up that savings for other purposes.  That you're thinking about these kinds of things at 16 strongly suggests that you're quite diligent, and applying that same diligence to your studies will open up a huge number of possibilities for you; take full advantage of that.

csuino

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Re: Investing as a teenager
« Reply #12 on: January 14, 2014, 01:13:12 AM »
The question I haven't seen anyone ask yet: what are your goals?  That's the biggest thing you need to ask yourself before you decide how to invest or spend your money.

For example, if you're starting early on saving for early retirement, you're probably pretty flexible on exactly when that happens, and thus you don't need to be particularly risk-averse; that then means you can weight your investing in index funds towards stocks rather than bonds.  If something goes wrong in the stock market, you can easily wait another couple of years to retire, and you'll still retire earlier than the vast majority of people.

If you're saving for some particular expense you anticipate in the future (e.g. moving out on your own, or purchasing your first car), that gives you a much shorter-term horizon for your investments, and you might want to choose something significantly safer and more risk-averse.

Since you're planning on going to college, you should definitely make sure you have enough saved for tuition and expenses during those years before almost any other type of savings.  You're in a position to avoid taking on any student debt.  However, just because you save for it, don't rule out the possibility of getting scholarships to pay for it instead, which frees up that savings for other purposes.  That you're thinking about these kinds of things at 16 strongly suggests that you're quite diligent, and applying that same diligence to your studies will open up a huge number of possibilities for you; take full advantage of that.

Thank you for the input. If I were to go and buy index funds, would it be possible to withdraw that money to pay for college when needed? Or would that not be a good short term investment? I suppose my main focus should be paying for college at the moment before saving for retirement and other things.

Self-employed-swami

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Re: Investing as a teenager
« Reply #13 on: January 14, 2014, 02:01:27 AM »
I started saving for retirement as a teenager, as soon as I had my first taxable income job (ie, not a paper route) at 15.  I opened an RRSP (the Canadian Registered Retirement Savings Plan, similar to a 401K I think).  I put $400 into a 'high interest' RRSP account (I think I was likely earning about 1% apr, so pretty low) but I think it got me started early.  Other than the years I was in uni, and had no taxable income, I have contributed into my RRSPs, which are now much better diversified.

You can have other short/medium term savings vehicles that won't fluctuate in value as much as stocks/ETFs, but will earn lower returns, (will be more stable), if you want the money for school in a few years.  Unfortunately, as a Canadian, I can't be much more helpful than that.  It pretty much boils down to sacrificing the potential of higher returns, for the security of not having to worry that you'll wind up needing the money, when the market is down.  But something tells me that you might already know that :)

We have these wonderful Registered Education Savings accounts here, where the government will kick in 20% of any contributions your parents make (to a max of $400/year I think).  We don't have kids yet, but we will be contributing the max we can to those programs, because a 20% grant is a pretty stellar return, even if the accounts can't hold that much.  And with the way it is set up here, we can transfer any unused funds to another kiddo, or into our own RRSPs, if they decide not to use it (minus any grant money, of course, or everyone would be getting RESP's to roll into the RRPS's).

I'm not sure exactly what age you are, but I've heard that "a random walk down wallstreet" is a very good beginner's investment book.  And I learned most of my compound interest stuff in grade 9 math class.  Do you have a trusted teacher that might have some more applicable American examples or suggestions?

Anyway, welcome, and good luck!  The fact that you are thinking about this before even finishing high school, is a wonderful thing, in my opinion :)

Khan

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Re: Investing as a teenager
« Reply #14 on: January 14, 2014, 02:21:04 AM »
Thank you for the input. If I were to go and buy index funds, would it be possible to withdraw that money to pay for college when needed? Or would that not be a good short term investment? I suppose my main focus should be paying for college at the moment before saving for retirement and other things.

Yes, you absolutely can withdraw your investments, sell them off. The problem is that yes, the stock market has averaged some 7% over the last 100 years, but during any 5 year period, absolutely anything can happen to your money. Down 16%? Check. Up 30%? Check.
http://observationsandnotes.blogspot.com/2009/04/best-worst-5-years-in-stock-market.html

As a rule, any money you need in the next ~5 years, you don't put in the stock market. And also, as a 16 year old with approximately 0 net worth, it's not worth expending much in the way of your mental energies to manage a couple thousand dollars in order to attempt to get a return of a couple percent when you can spend that energy on learning calculus, going to college or learning a trade and making a far better return on your energies then investing.

I will say that if you're going to invest, do it in a tax advantaged way. ROTH would probably be your best bet. Once there, the gains of your money will never be taxed again.

moestache

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Re: Investing as a teenager
« Reply #15 on: January 14, 2014, 02:31:46 AM »
Just wanted to say that you are doing the smart thing in learning about investing and what options you have before deciding on anything.

I started investing at 16 too, but at that time I didn't really do much research and ended up putting money into a costly managed fund and dollar cost averaging over the years. Forums like this didn't exist then so I couldn't ask for advice either!



Ziggurat

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Re: Investing as a teenager
« Reply #16 on: January 14, 2014, 06:18:38 AM »
I started saving for retirement as a teenager, as soon as I had my first taxable income job (ie, not a paper route) at 15.  I opened an RRSP (the Canadian Registered Retirement Savings Plan, similar to a 401K I think).  I put $400 into a 'high interest' RRSP account...

I like this option for the OP if you can manage it. Put some small amount away and try not to touch it. It gets you used to the processes, and to seeing the returns come in. At $400 the returns won't be that impressive, but you can imagine what they would be if it were 100 times higher, at $40,000 ... or even 1000 times higher, at $400,000, like many on the forum now have. Maybe you can also give the $400 some extra friends along the way.  By the end of college, it could be a pretty decent sum for compounding to launch from.

Also to plant another idea:  co-op. My son is in a co-op university program, and after his first year and a half, he started into work terms. The remainder of his education, he is working (on average) half the terms, and is academic the other half. The program is one year longer than a standard degree, but he will come out of that debt-free with only a little help from his parents (the work pays reasonably well, much better than min wage summer jobs) and with meaningful experience on his resume.  With co-op you have a decent chance of being able to cover school costs while still leaving a little bit invested.

And be sure to investigate all possible scholarships; there are many beyond the institution's entry scholarships.  For example, I just discovered that my union has a scholarship program for its members' kids.

csuino

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Re: Investing as a teenager
« Reply #17 on: January 14, 2014, 04:41:40 PM »
I started saving for retirement as a teenager, as soon as I had my first taxable income job (ie, not a paper route) at 15.  I opened an RRSP (the Canadian Registered Retirement Savings Plan, similar to a 401K I think).  I put $400 into a 'high interest' RRSP account...

I like this option for the OP if you can manage it. Put some small amount away and try not to touch it. It gets you used to the processes, and to seeing the returns come in. At $400 the returns won't be that impressive, but you can imagine what they would be if it were 100 times higher, at $40,000 ... or even 1000 times higher, at $400,000, like many on the forum now have. Maybe you can also give the $400 some extra friends along the way.  By the end of college, it could be a pretty decent sum for compounding to launch from.

Also to plant another idea:  co-op. My son is in a co-op university program, and after his first year and a half, he started into work terms. The remainder of his education, he is working (on average) half the terms, and is academic the other half. The program is one year longer than a standard degree, but he will come out of that debt-free with only a little help from his parents (the work pays reasonably well, much better than min wage summer jobs) and with meaningful experience on his resume.  With co-op you have a decent chance of being able to cover school costs while still leaving a little bit invested.

And be sure to investigate all possible scholarships; there are many beyond the institution's entry scholarships.  For example, I just discovered that my union has a scholarship program for its members' kids.

The Co-op deal sounds interesting.  I'll have to look into that more. Thanks

csuino

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Re: Investing as a teenager
« Reply #18 on: January 14, 2014, 04:49:59 PM »
Thank you for the input. If I were to go and buy index funds, would it be possible to withdraw that money to pay for college when needed? Or would that not be a good short term investment? I suppose my main focus should be paying for college at the moment before saving for retirement and other things.

Yes, you absolutely can withdraw your investments, sell them off. The problem is that yes, the stock market has averaged some 7% over the last 100 years, but during any 5 year period, absolutely anything can happen to your money. Down 16%? Check. Up 30%? Check.
http://observationsandnotes.blogspot.com/2009/04/best-worst-5-years-in-stock-market.html

As a rule, any money you need in the next ~5 years, you don't put in the stock market. And also, as a 16 year old with approximately 0 net worth, it's not worth expending much in the way of your mental energies to manage a couple thousand dollars in order to attempt to get a return of a couple percent when you can spend that energy on learning calculus, going to college or learning a trade and making a far better return on your energies then investing.

I will say that if you're going to invest, do it in a tax advantaged way. ROTH would probably be your best bet. Once there, the gains of your money will never be taxed again.

So you're recommending that I start with the Roth IRA, but no stocks or index funds for now? The 5 year rule makes sense, so I'm glad you mentioned that.

Khan

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Re: Investing as a teenager
« Reply #19 on: January 29, 2014, 06:58:09 AM »
You can invest in any type of asset inside a ROTH IRA. My first Roth I opened as a 7 year CD(3.8% interest, it was my first investing step, matures in 2016). You can hold stocks, index funds, mutual funds, ETF's, bonds, damn near anything inside a roth account.

You can open a ROTH with any of the agencies you'd want to. TD Ameritrade, Vanguard... other places...

But if you -are- going to invest, and if you can go ROTH(dunno anything about age rules), then that'd be the place to do it instead of a taxable account. You don't pay taxes on the gains, and it's still almost as easily accessible as a regular investing account.

But again, I'd stress that for you, the most powerful thing to do is invest in yourself, in your skills. And not even in the financial rules and regulations to minimize your taxable assets and try to get as high of a return as possible on your money(because you don't really have any). Invest in your skills that will make you supremely employable.

I spend far too much time playing with my invested money, when the best possible thing I could do for myself isn't to manage my small ~120k worth of assets... but to become a software developer and boost my earnings by a good ~30%+, or get a degree so that I can move up the corporate ladder that they won't let me into without it.

The gains you would get from becoming skilled in ways that increase your ability to earn money far exceed that payoff.

willn

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Re: Investing as a teenager
« Reply #20 on: January 29, 2014, 03:30:51 PM »
Great that you're thinking about this.  College is going to have the best return on investment, so do everything you can to get through it debt free, first.  Then, Roth IRA, then IRA.

For IRA's you may note that you can't contribute if you don't have earned income--and you can't contribute more than your income to a max of 5500.  So if the money was gifted or saved, that may limit you.  If its from a job, you're golden!

greaper007

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Re: Investing as a teenager
« Reply #21 on: January 29, 2014, 09:44:25 PM »
I started investing at 16, my dad would match my IRA contribution so I'd max it out at $2000.    Then I stopped when I went to college.   I haven't touched that account in 18 years and it's up to about $10,000 now (it should be more but I had a bad broker, don't ask).

Even if you can only invest a little bit of money now, I think investing is the way to go.    There's lots of options available to you, and it might be wise to talk to your parent's financial person.    If your parents have enough money with the dude/ette, he might even waive the brokerage fees.

If you need this money for college, I believe that's an option with a roth IRA.

MustachianAccountant

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Re: Investing as a teenager
« Reply #22 on: January 30, 2014, 07:44:43 AM »
I'd put the money in a Roth. You can withdraw the money without paying the tax penalty for education: http://www.irs.gov/publications/p970/ch09.html#en_US_2013_publink1000178586

If you're intending to do that, I'd not recommend the Total Stock Market index though, as some commenters have said, for the short term, that's not a good bet.

You may want to just put the money in the IRA though, using the Total Stock Market index, and say, "This money is for retirement" and forget about it. This will force you to look elsewhere for college funds, or come up with an "alternate" college plan (scholarships, 2 yrs at Community College, etc). Also, sit down with your parents, and find out if they were intending to help you out with college.

It's good to have a college plan, and it's good to save for retirement.

PS - I disagree that college is, hands down, "the best return on your investment." That's a load of BS. It CAN be good, and it can also be a really bad decision. There are a lot of paths in life that don't require a college education. Don't think that you MUST go to college to lead a happy life.

rubybeth

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Re: Investing as a teenager
« Reply #23 on: January 30, 2014, 08:26:27 AM »
Others have given more financial-based advice. I just want to chime in to say WAY TO GO! I wish more teenagers thought about the long-term. When I was 16, I blew pretty much all my income from my job on CDs, concert tickets, and gas getting to those concerts. My parents gave me the best gift by encouraging me to live at home while going to the local university, which saved me from undergrad student loan debt.

Since you're 16, I'm wondering if you are able to take some college level classes while in high school. My school had a couple of options to do this; either classes at the high school taught by professors from the local university that would transfer to any school, or the option to actually take a college class at the university. I'm guessing you might be doing this, but if not, it can be a great deal.

I'll also add that I think it's awesome that you have a job. I know of many 22 year old college graduates who have never had a real job. Developing a work ethic and a resume while still in high school is, I think, a huge advantage over your peers.

Best of luck, and welcome to the MMM community! :)

Hedge_87

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Re: Investing as a teenager
« Reply #24 on: January 30, 2014, 08:47:27 AM »
Just want to say good job! I wish I would have had this mind set at your age. College is a good investment IF you have an end goal in mind. Make sure you pick a degree that is going to get you placed in a good career doing something you enjoy and makes some decent money. I also recomend knocking out some gen eds while you are in high school they are a lot cheaper. I started making really good money at 19 and although I did pretty good being frugal and investing the difference, looking back I could have done a lot better. Like where your heads at though!