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Investing $5,000 at 16 Years-Old (Get Rich as a Teenager)

$5,000 at 16 Years-Old

According to a GoBankingRates survey, American savings have dropped to the lowest point in years. Specifically, the survey found that 50% of Americans had less than $600 in savings, and 57.4% had less than $1000, compared with 69% of Americans with less than $1000 in December 2019.

Of course, I’d be remiss not to mention the elephant in the room. And, that obviously, was the devastating global pandemic that seems never to want to end. However, even before that, most Americans didn’t have all that much stashed aside in savings.

So, I wouldn’t blame you if you were gobsmacked to learn that there are teenagers out there who have thousands of dollars set aside to play with. But, if you take a step back, this actually shouldn’t be all that shocking.

Do teenagers really have $5000 to invest?

Let’s say that you’re a teenager who has a part-time job after school or who works during your summer break. If you made the federal minimum wage is $7.25 per hour and worked 20 hours per week, you could make $7,540 per year. Unless your family is in a financial crisis and you’re helping out with the bills, that’s pretty much all yours. After all, as a teen, you aren’t bogged down with monthly expenses like rent or student loan debt.

In short, it’s possible for a 16-year to have $5,000 at their disposal. But, how can that money be put to use?

Well, I had a cousin who worked his tail off to purchase a car when he got his license. I’ve also had friends who needed to save this money to cover college expenses. Or, if you’re fortunate enough, you can invest this $5,000 and get rich.

With that in mind, if you’re a parent or teenager hoping to strike it rich at a young age, here are seven guaranteed ways to achieve that financial goal before your 20s.

1. Open a checking account.

Although not extremely exciting or lucrative, this is a simple way to get your teenager familiar with the idea of investing. Why? Using a debit card and writing checks when necessary will help them learn financial responsibility and how to manage their balance correctly.

In short, to begin investing, you need this financial foundation.

While you could visit your local brick-and-mortar bank, you might want to check out the Axos Bank First Checking account. It’s designed specifically for teenagers between 13 and 17 years old who earn a 0.10% APY on the balance. Plus, there are no monthly maintenance or overdraft fees. And, there are also daily transaction limits of $100 in cash or $500 on the debit card.

Additionally, ATM fees in the United States can be reimbursed up to $12 per month. So, if your teen uses an ATM outside the network, they will be reimbursed for up to $12.

Again, your teen won’t be making big money here. But, it’s a great starting point for them to enhance their financial literacy.

2. Start a savings account.

I understand some of you might roll your eyes at the mere mention of a savings account. Nonetheless, this is another excellent way for your teen to learn about money basics while not having to venture into the complicated and risky world of investments as a newbie.

For example, the American Express® High Yield Savings Account offers a 0.40% Annual Percentage Yield. In addition, there’s no minimum deposit required to open the account. What’s more, there aren’t any monthly maintenance fees — which should give your teen some peace of mind of losing money from unnecessary and pricey bank fees. And, you’re allowed to make up to 9 withdrawals per month if they want to move their money around.

While not the most profitable option, it’s a safe way to introduce your teen to investing. Besides, most companies require an investment minimum. As such, this ensures that your teen has sufficient funds to start investing.

3. Use a custodial account.

There’s one drawback to being a teenage investor; you have to be at least 18 years old. The good news? There is a way to overcome this hurdle through custodial accounts.

If you’re not familiar with these types of accounts, here’s how they work.

“A parent or guardian opens a custodial account for you and then ‘gifts’ funds into it,” explains Kevin Mercadante for Investor Junkie. “For 2020, up to $15,000 can be gifted into a custodial account.”

He adds that when the money is in your account, you can begin investing it. However, the actual trade must be made by your parent or guardian. In addition, you won’t be able to contact your account broker to execute trades as a teenager because they will retain control over the account.

“However, you can be part of the investment process,” Mercadante states. “You can create a portfolio allocation and select asset classes and even specific investments.”

After reaching the legal age in your state, usually between 18 to 21, you’ll become the owner of the account. As a result of the custodial arrangement, you should now be fully capable of managing the account.

Mercadante suggests starting with stocks, specifically stocks on the Dividend Aristocrat list. Companies, such as Target or Cocoa-Cola, have a history of increasing dividend payouts. From there, you’ll want to have a diversified custodial account that contains low-cost mutual funds and high-yield savings accounts.

4. Work with a robo-advisor.

“Traditionally, a financial advisor’s experience has been the only option to guide you through an investment strategy, other than figuring out what to do on your own,” writes John Allen in a previous Due article. “One of these costs money; the other costs time.”

Fortunately, there are many robo-advisors available to those who are interested in investing. “They provide financial guidance based on algorithms using cutting-edge research,” Allen explains. “For a much smaller fee, robos offer focused advice and plan your investments in line with your objectives.”

“In recent years, the robo-advice market has grown rapidly, with brands such as Wealthfront and Betterment controlling billions of dollars,” he adds. ‘As with any emerging technology, though, it’s natural and right to be cautious. So often, hype exceeds the reality.”

So, before going much further, you must do your due diligence and weigh the pros and cons of robos.

In general, robo-advisors are designed to be tailored to your specific situation. There’s also a low entry barrier and numerous features to optimize your finances.

On the downside, robos can be impersonal and expensive. Customer service can also be a concern in such a crowded market. And, like all investments, there’s still risk involved.

Do robo-advisors require custodians?

Short answer? Yes. However, not all robo-advisors offer custodial accounts, such as Robinhood. As such, this isn’t an option for teenagers looking to invest. However, robo-advisors like M1 Finance do allow custodial accounts.

“So with M1 Finance, very similar to a Betterment, very similar to a Robinhood,” says Jeff Rose, aka The Wealth Hacker. “The only difference what I see as far as M1 Finance does, or how they structure their portfolios, is that they do these investment pies.”

You might think of pie, like a pizza, where you would pick from four different stocks. But then you decide if you were to invest $5000, how would it be divided? And, you would prefer the money to be split up into different pies?

“So do I wanna do it equally, or do I wanna do say 15% in this pie and maybe 35% in maybe this pie, and then 10% in this pie?” asks Rose. These pies could be, as an example, Facebook or Tesla stock. But, you can also pick an ETF, such as a Vanguard ETF, and even self-directed 401(k)s.

Overall, you want to “construct these pies however you feel comfortable,” he says.

Besides creating your own pie, M1 has expert pies that have either been created by investment professionals on the M1 Finance team. For those new to investing, this simplifies the process and makes it much less overwhelming as well.

5. Roth IRA.

“Just talking about the Roth IRA, anybody that is younger, and you have time on your side, a Roth IRA is by far one of the greatest investment tools that exist,” says Rose. In fact, according to him, this might even be considered “the greatest investment tool” available.

The reason? It’s tax-free money.

“Tax-free. That is a phrase that I will never get tired of saying,” he explains.

It’s huge for a 16-year-old to start investing, and to make sure they’re putting money in the stock market, and to take advantage of the compounding interest so that they will have tax-free money later on in life, he says. Furthermore, if you’ve been participating in the plan for at least five years and are over 59 ½ years of age, you can withdraw funds tax-free from a Roth IRA account. That means prior to achieving adulthood; a teenager can start earning tax-free income for their retirement.

A Roth IRA also does not allow you to deduct your contributions from your taxes. Additionally, contributions to a Roth IRA can be withdrawn tax-free and penalty-free whenever needed. This is a significant advantage for a teenager who is building an investment portfolio and will likely need the money well before they retire.

Furthermore, unlike traditional IRAs, the IRS doesn’t calculate withdrawals based on investments and contribution earnings. As such, teenagers will be able to withdraw the total amount of their contributions.

Custodial Roth IRAs

Just note that like other custodian accounts, you’ll have to set up the Roth IRA for them — whether you’re parent, grandparent, or guardian.

Fidelity, which offers such an account, notes that “the custodian maintains control of the child’s Roth IRA, including decisions about contributions, investments, and distributions. In addition, statements are sent to the custodian.”

Nevertheless, the minor remains the beneficial account owner, and its funds must be used for its benefit. In most states, the assets of a minor must be transferred to a new account in their name at a certain age, typically either 18 or 21.

If you’re a teen wanting to set up a Roth IRA, there’s one final thing to remember. You need to have a reportable earned income, says Rose. That means a W2 is required. In other words, this “cannot be something that you are doing on the side,” like mowing lawns or babysitting.

While it’s awesome that you’re earning money, “if you are not reporting that to the IRS” and “not paying any taxes on that money, then you cannot use that as a way to open up a Roth IRA,” Rose clarifies.

6. Open a 529 plan.

As we all know, college is expensive. So, if you or your teen is planning to continue their education, expect their student loan debt to be around $30,000. Buried under college debt can prevent you from growing wealth since you won’t have enough funds to invest.

To avoid taking out a student loan, you could open a 529 plan.

A 529 plan is an investment account where contributions aren’t taxed. A 529 plan can be used to pay for college, K-12 tuition, apprenticeship programs, and student loan repayment, as well as textbooks and computers.

The investment portfolios of 529 plans can be customized to suit account owners’ risk tolerance and timeframe. Depending on the performance of the investment option you select, the value of your account may rise or fall. Therefore, it’s crucial to determine your investment objectives and compare the available options before investing.

7. Start or invest in a business.

By starting a business, your teen can learn about investing while having a lot of fun pursuing a passion. In fact, from 2009 t0 2019, the number of teens starting businesses has skyrocketed from 500 to 4,000.

A teen can benefit from starting a business in many ways. In the first place, entrepreneurship provides an incredibly enlightening experience. Most notably, hard work and the ability to fail gracefully. Lessons like these will stay with your teen forever.

Aside from the life lessons teens can learn, starting a business can be very financially rewarding too. Entrepreneurship can help a person build wealth not only now but also in the future. In turn, this gives teens a greater sense of financial freedom.

If your teen isn’t willing to go out on a limb, they can also invest in a business. Just make sure that you carefully vet the business to ensure that it’s not a scam and can be sustainable.

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Wealth Expert at Due
Jeff Rose is an Iraqi Combat Veteran and founder of Good Financial Cents. He teaches people wealth hacking. He is a frequent on CNBC, Forbes, Nasdaq and many other publications. He is author of the book “Soldier of Finance: Take Charge of Your Money and Invest in your Future” where he teaches how he escaped from $20,000 in credit card debt to a life of wealth.

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