Your teens could become the next generation of successful investors and wealth builders! And financially independent! It can start with their first investment.
Your teens are curious, smart and savvy. And sometimes a handful! But they are also at an ideal age to start investing. Getting your teens interested in investing will help them develop good money habits, become financially responsible and build their generational wealth.
Investing from an early age builds more wealth
The earlier you start investing, the more your investments can grow and the more you can benefit. Teens have plenty of years to take advantage of compound interest and to see their investments increase in value!
Investing early in life also develops good money habits and can teach your children the value of money. Living a financially healthy lifestyle and growing your wealth only happens when you live within your means, save and invest. For most of us, this means we need to keep the spending in check! Spend too much and there is nothing left to invest. Start investing young and investing becomes a habit you can keep for the rest of your life!
Make investing exciting for your teen
Let’s face it, teens are more likely to invest if they see it as desirable and exciting. They’ll need some basic knowledge about why to invest and the benefits of investing but make this as relevant to their lives as possible to get them interested. Here are some tips to help your teen become smart investors!
Help your teen understand investments
Investing gives your teen’s money the opportunity to grow and earn interest and/or dividends or profits. It is different to pure savings which is where your money has less opportunity to grow as it typically earns only interest. For example, a bank account opened with R1 000 earning 5% interest per year will be worth R1 050 in one year. An investment of R1 000 that earns dividends and grows at 8% will be worth R1 080 in one year. In five years, the difference in the growth is nearly double, R280 growth in the savings account compared to R490 growth in the investment account. Make sure your teen knows the difference.
You can take the free financial education course on Truth About Money to help you understand more about the world of money and investing. The JSE is also a good place to learn about investing, as are the website pages of various financial services providers, such as those who offer unit trusts and exchange traded funds. You can also play the JSE Virtual Trading Game to learn more about investing.
Give them a reason to invest
This could be anything from travelling or studying overseas after school to having enough for a deposit on a house or buying a car for cash. Or, even starting their own business! Retirement is often an investment goal, but it is hard for teens to get excited about this because it is so far in the future. If you have retired relatives who struggle financially you can explain to your teens how investing now can help them avoid a situation where they rely on other people when they are older and unable to work. But if your teen can’t relate to this or get excited about it rather find an investment goal they are passionate about.
Make it relative to your teen
Your teen will have favourite brands and products. They can find ways to invest in these companies, such as investing in the shares of a preferred cellphone or clothing brand directly or through an investment such as a unit trust or exchange traded fund (ETF) that owns shares in these companies. Your teen can own a part of the company, as well as supporting their products and services!
Use role models
Whether they are on Tiktok or YouTube, a celebrity or sportsperson, there are many young people who are actively investing to grow their wealth. Encourage your teens to follow these influencers and emulate their good investing habits!
Where to invest
The tricky part! Your teen can open an investment account although they usually need you to sign on their behalf until they reach 18 years. They will need an ID, and at 18 they will need some FICA documents to show proof of address.
Investment options include:
- Unit trusts or ETFs
- An online platform such as EasyEquities
When your teen’s investment grows they can look at investing in businesses or property directly.
Chances are high your teen will consider a cryptocurrency investment. These are in the process of being regulated in South Africa, and when they are there will be authorised sellers of these investments and guidelines they must follow. Until then, investing in cryptocurrency is an option where you invest at your own risk! Cryptocurrencies can be very volatile, which means the price can go up and down, quickly and by a large amount. For example, in June 2020 the price of Bitcoin in US dollars was 9 188. In October 2021 it had risen to US$61 774! Then it went down again to US$19 457 in October 2022. Investors can lose a lot of money very quickly with these investments unless they are very careful!
Understand the fees
Investment fees and any advice fees will impact the investment and can eat into returns. Help your teen understand that any investment has fees, much like a bank account and bank account charges. Before they invest, make sure they know which fees apply, how and when. If you use a financial adviser they will also charge a fee.
You can encourage your teens to compare fees so they know which investments have lower fees, such as ETFS that invest in an index, and which have higher fees, such as actively managed unit trust funds where a fund manager researches shares and decides when, where and how much to invest.
Know the risks
The benefits and rewards of investing are great, but there are a few risks you and your teen need to know about before you decide on the right investment.
Capital loss and volatility
Unlike savings, there is a risk that your teen can lose money in an investment, for example if a company they invest in goes bankrupt, or the price of the cryptocurrency falls. This is the downside of investing. The upside is that investments can grow, increasing your money substantially! Your teen should appreciate that there are risks, that the value of investments can go up and down, and that there are ways to reduce risk and manage it, such as diversifying, which is when you spread the risk by investing in a number of different investments so all your eggs are not in one basket! For example, your teens can invest in a unit trust that has a number of investments in shares of different companies. Your teens should also not invest money they cannot afford to lose.
It is safer to buy investments from authorised financial services providers who follow standards and guidelines, to ensure investments are well managed in the client’s best interests and not unnecessarily risky.
Encourage your teens to make strategic, objective investment decisions based on research that can give a good idea of how well an investment can perform, rather than investing solely on the basis of their emotions. For example, investing in a unit trust that has a good long-term performance record is preferable to investing in a unit trust because they like the brand!
You should also help your teen understand that advice on where and when to invest is best taken from a financial adviser, and that personal recommendations or those given online may not be suitable for their investment strategy.
Some investments are suitable for longer terms, such as a unit trust that invests in equities and has a recommended investment term of five or more years. Help your teen understand that if they take money out of their investment before the recommended term ends they may not see the returns or growth they would like. One way to ensure this does not happen is to have some savings as well as the investment. If they need or want cash, they can use their savings and leave their investment to grow!
Selling an investment
Your teen needs to know when a good time is to sell an investment and how they can sell their investment.
To make money, you need to sell an investment for more than the price you paid for it! This is when you buy low and sell high. Of course, if you sell an investment for less than you paid for it you will lose money! So keep an eye on prices and encourage your teen to keep a record of statements or set up their own records to show the price of their investments (which should be on statements or online).
If your teens are really interested in investing they can start trading, and learn about how you can actively manage your trades on a platform, short shares and other advanced trading techniques! Just be sure you all understand these risks.
You also need to check how easy it is to sell an investment. Unit trusts and ETFs from authorised providers have to be repurchased in a certain time, usually within a few days. Selling on online platforms such as EasyEquities, and selling cryptocurrencies requires a buyer, who may take some time to find, and they may want to negotiate the price. Your teen needs to take this into account when they are deciding when and how much to invest.
Make investing a way of life!
Talk about money and investing at home so your teens become familiar with money management skills and investing. Gifts that add to an investment or start one are another way to make investing part of their lives and yours. With time, research and some encouragement, your teen will be making their money work for them!