Investing early is fantastic for one’s long-term finances. Best case scenario, money trickles into a brokerage account and, thanks to the magic of compound interest, emerges as a flood of high-yield savings — enough to take the edge off college fees and other big expenses.
Here’s how you can start investing before 18 years old, how to invest smartly, and things both parents and teens should know before opening a custodial account.
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Open a custodial account
Investing as a teenager requires two things: parental participation and a custodial brokerage account. A custodial account is a brokerage account that parents can open for their children. The parent, the custodian, has final authority over the account within legal limits.
The main perks of custodial accounts:
- They are easy to open.
- They have zero contribution limits and offer investment flexibility.
- Money can be withdrawn anytime, so long as it directly benefits the minor.
Minors may want to open a custodial account to save money toward paying for college expenses, trips abroad, or a first apartment. Parents may be interested in opening a custodial account to kindle a healthy interest in “boring” finances within their child.
Regardless, opening a custodial account is a firm step in the right direction. Investors who understand how money compounds can only dream of the wealth they might have built had they begun when they were teenagers.
Follow long-term financial advice from experts
Financial experts like Suze Orman typically bring up a handful of rules that help investors make money. To make the best of investing before you turn 18, consider the following:
- Stocks are historically some of the best long-term investments.
- Diversification makes portfolios more likely to earn income.
- Having money invested before 18 is an uncommon advantage.
This general wisdom holds for all investors, but it’s essential for minors new to the stock market.
Parents ultimately control the custodial account, but they’ll probably want to involve their children in investing.
Why? One day, minors will have complete control over the remaining funds. Custodial accounts come with risks. This brings us to some things parents and folks under 18 should know.
What to know before opening a custodial account
Two important things:
- Custodial accounts may reduce eligibility for college-related financial aid.
- Minors have total control over the account when they come of age.
Colleges and the government consider custodial accounts when determining how much financial aid to distribute. Consider opening a tax-advantaged 529 savings plan instead if you want to spend 100% of those savings on college expenses.
A minor has complete control over the custodial account when they come of age. As many parents know, when money seems easy-come, it often ends up easy-go. Proving to minors that, hey, this money took an effort to build is part of preparing them to manage their account smartly.
Some custodial accounts, like Acorns, come with educational content. Building financial literacy is essential to getting minors up to speed on how money works. Custodial accounts allow minors to practice investing, saving, and spending with little downside.
Consider combining active participation with a top-tier custodial account to put that money to work. Starting early builds long-term savings and gives teens a head-start advantage. Properly executed, investing before 18 can be a win-win for teens and parents both.
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