Investing can seem a daunting task. However, investing early on can let the magic of compounding do its work as time passes and increase over time. Compounding money takes time, and teens can use the time to their advantage, giving them greater earnings over the course of their life.
But, how does compounding work in the first place and why should you invest early?
Let's start with a small story of a famous investor: Warren Buffett. Buffett is one of the wealthiest financial investors in history, with over $80 billion in net worth. While his wealth is partially a result of his choice of investments, the greatest factor in his success is time. He started investing his money from odd jobs when he was 10 years old, putting the extra money into savings and investing as much as he could. Because of this, the effect of compounding his wealth made him become a millionaire at the early age of thirty. He proved that investing is the “most realistic way to get rich” (thewaystowealth).
We learn how to compound interest, with formulas resembling the principal amount (P), multiplied by one plus the rate (r) over the number (n) of times the money is compounded per year, raised to the power of the amount of time (t).
It may look something like this:
A = P(1 + r/n)nt
What this process does, however, is it takes the money you put into the account and calculates it using this formula to grow the amount over time. The average rate at which your investments compound is around 7% per year, adjusted for inflation.
The longer an investment compounds, the higher the value is. This can make teens who invested earlier wealthier than adults by retirement.
Now that you know WHY to start investing early, this is how you start.
The first step is to inform yourself on how, what, when, and why to invest. Articles like this one on the internet can help, but also reading and watching professional investors talk about their experiences can give you a better idea of what to expect.
Learning what to do and what not to do can help prevent larger mistakes in the future and can also let you know what the best practices are to follow.
After you have brushed up on what exactly to do, you need to think about what kind of investor you want to become. There are many ways to invest, some riskier than others. Decide whether you like taking risks, earning money, getting deals, and whether you want to be active or passive when investing.
To learn more about the different types of investments, see our other articles on dividend and value investing!
While these options are for regularly active investors, the more passive of us may want to sit back, and invest in funds called index and mutual funds, which judge stock index and invest your money for you and will grow as time passes.
Once you have established what kind of investor you want to be, research the companies you identify with or believe in. Then learn about their financial stability in the past, and judge if they will stay in business in the future.
Since people under the age of eighteen cannot legally open a brokerage account under their name, custodial accounts, or UTMA/UGMA accounts are set up by parents for the child. These accounts will turn over when the child reaches the specified age (depending on the state).
Since your parents manage the account until you are eighteen, by law, you can discuss investments and gain helpful advice if they are more experienced. Setting up the custodial account can usually take about 15 minutes and is an effortless process.
After the custodial account has been set up, making your first investment through a market order is the best idea. A market order buys the stock at the exact price it is when the order is placed. This is ideal for long-term investing as you have already researched the company and believe it will do well in the future. The only downside of a market order in a long-term investment is if the price of the stock changes immediately before your purchase, you may end up paying much more than expected.
To find more information about brokerage accounts, which is being published next week!
One of the biggest mistakes made when investing is not being informed and jumping into it without a plan. Learning to invest early can allow you to make the mistake you will make on a small scale, without losing a significant amount of money.
Investing your money early can give you a massive head start on finances in life, as it can bolster your financial security and allow you to make more comfortable financial decisions. Learning to invest can give you a greater understanding of how to manage your money, which in turn can allow you to invest more over the course of your lifetime. FLC will provide you with the resources to do this!
