Good money habits are an essential life skill, and parents can start explaining financial lessons with their teenagers.
In addition to teaching kids the importance of saving, teenagers are also at an age where they can start to grasp the idea of investing. For teens who have first jobs, it’s a perfect opportunity to get into budgeting.
“The earlier you start saving, the better off you’ll be in the future,” says Robert Siuty, a senior financial consultant at TD Ameritrade. “Compounding returns over time can have a profound impact on your financial situation in the years ahead,” he adds. Siuty says teens should take the “pay yourself first” approach, even if it’s just a small amount. Those small amounts over time can really add up to a significant nest egg in the future.
How to Start Investing
Siuty says that by saving early and often, teens should begin to visualize the benefits of accumulation with each passing month and year. “Once the right saving behaviors are in place, learning about investing and the markets could help them gain an even better understanding about how their money could work harder for them,” Siuty says.
Mary Ryan, manager of TD Ameritrade U, an educational program that brings together virtual trading and real-world market experience into the college classroom, agrees. She says parents can start introducing these concepts with the paperMoney trading application, which is a practice trading platform. It’s a good way to empower teenagers to understand the fundamentals and research that goes into investing. One example she likes to use is Disney (DIS).
“In the company profile tool, you can break down a company like Disney and see how they derive revenue from movies, theme parks, and broadcasting, to demonstrate the different components that make up the company,” she says.
FIGURE 1: COMPANY PROFILE.
In the thinkorswim® platform from TD Ameritrade, under the Trade tab, click All Products > Company Profile. Data source: Trefis. For illustrative purposes only. Past performance does not guarantee future results. Inclusion of specific security names does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
What Parents Can Do
Although children can’t open accounts, parents can open several accounts in their child’s name, such as a Coverdell Education Savings Account, a 529 plan, or a Uniform Transfers to Minors Account/Uniformed Gifts to Minors Account. Ryan says parents can invest along with their children and together discuss which companies to pick.
It’s a great way to explain how assets can grow and to introduce the concept of compounding interest.
“Especially with college students, they’re not aware of how compounding interest works, especially now because there have been no interest rates,” Ryan said.
Parental guidance during the teenage years gives kids a good grounding for when they head off to college.
First start with a conversation. According to the 1,000 parents who took part in a study commissioned by TD Ameritrade*, both personal finance (investing, saving, debt) and family finances are conversations that generally take place when a child is between 13 and 16.
Money lessons for college students are slightly different; it’s the first time many are living independently, Ryan and Siuty said. That’s why teaching lessons on budgeting and the proper way to build credit are so important.
Once children are in college and are over the age of 18, they can take advantage of the skills they learned via paperMoney.
“They can take their investing to another level with TD Ameritrade U,” Ryan says. She says college students can also participate in the thinkorswim Challenge, in which hundreds of teams from across the country compete in a simulated trading environment.
Making saving and investing more fun, meaningful and interactive may help teens get on a solid financial path, and stay on it through adulthood.
Practice Trading on thinkorswim
Practice analyzing, strategizing, and trading like nobody’s business with paperMoney® on the TD Ameritrade thinkorswim® platform.
Register and start paper-trading for free »
All investing involves risks, including loss of principal.