Teenagers: It’s Never Too Early to Start Investing

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Real estate investments can be not only lucrative, but also generally rewarding. There’s profit that can be made in the long-term and it’s a skill you can learn at any age, even if you’re too young to actually participate. This means that even teens can learn to make investments in real estate and begin to build a portfolio.

Learning different lessons about and making real estate investments in your teens can give you a massive head start in the industry and even more time to grow your portfolio.

What are the roadblocks for teen investors?

Unfortunately, many investment accounts and options are only available for people 18 and up. Getting involved in real estate depends on the state, but at least in New York City, people need to be 20 years old to apply for a real estate license.

But even before you can invest, you need to build credit, and that can be its own barrier. To open a credit card or take out a loan in the U.S., applicants need to be at least 18. Even though 18 is still technically a teen, it limits what investments teens can make at a younger age.

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Also since teens can’t open credit cards or take out loans, it does make the process that much more difficult for teens to make investments and begin their portfolios.

Luckily, there are ways to work around a lot of these issues. If you arm yourself with the right knowledge you can start to build the portfolio that will get you on the right track.

How to invest in real estate in your teenage years

When it comes to investing, time works to your advantage. That’s why it’s so beneficial to begin as soon as possible, especially if you plan on making it a primary source of income. The price of real estate increases over time, so starting sooner allows you to buy it for less money and make more on your revenue.

But it makes sense that, like a lot of teenagers, you won’t know where to start, so that’s easier said than done. Plus, you probably don’t have the money to make any serious investments. But even though it sounds like a daunting task, even investing in real estate can be done at a young age with enough knowledge and determination. Below are tips that will make investments for teens that much more attainable.

1. Read as much as you can

Congratulations on beginning your personal finance journey! Reading as much as possible from credible sources of information will be vital for your growth and understanding. Reading articles like this, for example, is a great starting point in the investment process.

BiggerPockets.com, for example, is loaded with forums, podcasts, blogs, guides, webinars, videos, and courses. Dive in and consume as much information as you can. The knowledge to be gained from the site is both free and invaluable. It can lay the groundwork for smart investing in the years to come. And because so much of it is free, there’s always an option for people of any income level.

Some books and articles on investment topics are great resources for timeless information, but you shouldn’t limit yourself to just books and articles. YouTube has a whole financial trove of credible information with tips and advice on budgeting, real estate, high-interest savings accounts, Roth IRAs, index funds, and more. Credible YouTube channels will be easily verifiable with a quick Google search to ensure the information they’re giving you is accurate and that they’re actually a pro in the field.

2. Begin building credit

When it comes to credit, understanding what it is and how it can impact your life moving forward is something we all should know. The sooner you know, the better.

Credit affects things like where you can live, what kind of car you’re able to buy, what kind of loans you can be approved for, and more. This may not seem like a big deal when you’re a teenager, considering that so many live with their parents or have someone to look after them. But when you’re ready to take on adulthood, you’ll see just how important these different aspects are.

Luckily, there are many ways you can start to build credit to start the investment portfolio of your dreams, including student loans and credit cards. In fact, student loans are typically the first instance where teens are exposed to how their credit impacts them.

With a low credit score, it’s difficult to take out school loans, which limits options for higher education. And if you do get approved for loans, you may be left with a high interest rate and other fees that will make it more difficult to pay off the debt and save money. But making payments on time has a positive impact on your credit score that will make it easier for you to become an investor in the long-term.

All of these things can be said for credit cards. They are great for building credit if used responsibly and you can get started on a path that makes it easier for creditors to trust you and give you high credit limits. If you’re responsible, these cards will help you maintain a high score, which also gives you more investment opportunities.

One way to build up a good credit score before you ever even have to think about a college loan is by having a parent add you as an authorized user on one of their credit cards.

“With good payment behavior and responsible use, adding an authorized user may have a positive impact on the authorized user’s credit score,” said Monica Bauder, senior director of digital partnerships and cardholder access at Capital One in an interview with U.S. News. If your parent is responsible with payments, this could set you off on the right track before you even set foot on it.

3. Work and save

Even with clever financing, a lender will require you to have some skin in the game (meaning money on the line). It’s important that you have some cash saved in your name sooner rather than later. This means working hard and putting away a large portion of every paycheck you earn.

While there are plenty of jobs that will hire teens as young as 16,  teens can also choose to go into business for themselves with skills such as tutoring, home and lawn maintenance, or babysitting. Those earnings can be used to invest.

The amount you save looks different for everyone. Some people start saving earlier than others with varying kinds of financial responsibilities, but aiming to put aside a certain amount from each paycheck is a great first step. It’s easier than ever to do so with all the apps out there. Many banking apps allow you to autosave so you can have a dedicated amount of money automatically put into a savings account with each deposit and not have to even think about it. This way, the withdrawals you’re able to make allow you to have all kinds of options when you want to invest.

Be mindful that not all savings accounts are created equal and a high-interest savings account is a great option for long-term saving. Even if your bank doesn’t have a high-interest option, many banking apps allow you to link your account to another in order to make transfers as seamless as possible. This also makes it possible for you to make the kinds of gains you’ll need to make investments.  

What are the different types of investments?

While investing in real estate is a great move, there are so many different things to invest in that can build a diverse portfolio and be both personally and professionally beneficial. Things like IRAs, certificates of deposit (CDs), and high-interest savings accounts are great for personal growth and building wealth to help you build a portfolio, whereas things like mutual funds, index funds, and brokerage accounts are specific to your investing needs.

One thing to keep in mind: If you’re still a minor, some accounts will require an adult custodian until you reach the age of majority. This will typically be a parent or guardian.

1. IRAs

If you’re looking to build for the future, IRAs are where you want to go. An IRA or an individual retirement account helps you save for retirement—and your initial investments may be tax-free. The different IRAs include Roth and Traditional IRAs. According to USAA, the traditional IRA is typically for people who plan on being in a lower tax bracket in retirement. Meanwhile, a Roth IRA is for those who believe they’ll be in a higher tax bracket in retirement compared to the one they’re in while they’re working.

The main difference is taxes. Money contributed to a traditional IRA is tax-deductible from the start, but you’ll have to pay taxes when you pull it out of the account. You’ll pay income tax on funds contributed to a Roth IRA immediately, but won’t pay any taxes after retirement.

While there are other differences, the good thing about both IRAs is that there’s no age limit and you can earn any income and still qualify. Some brokerages, like Vanguard and Fidelity, do have a minimum investment requirement, but there are plenty that don’t, so if you’re starting out low on cash, this is still a great option.

2. Brokerage accounts

A brokerage account, also known as a securities account, is an account that holds all kinds of financial investments. With this account, you would work with a brokerage, broker, or bank that would help you buy and sell different assets like stocks, mutual funds, and bonds.

For organizational purposes, keeping all of these assets in one place is a good idea. When it’s tax time, you can pull all your info from one space and make the process that much easier. Also, many places that offer these accounts have educational tools and resources to help you on your journey.

3. Mutual and index funds

Mutual and index funds may sound similar. They’re both ways of investing in the stock market—with less risk than pouring money into Gamestop. But they have some significant differences you need to be aware of before opening them.

Index funds focus on a specific set of investments, like stocks in certain types of companies. A mutual fund is broader and can change up what it’s used for by an investment manager. Active mutual funds tend to have higher fees and are less predictable over time in comparison to index funds.

Even putting the leftover income from your part-time job into a simple high-yield savings account can help you dip your toes in investing. No matter which investing strategy you use, what’s important is that you start. You’re so young, and your money has so much time to grow.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.