Investing early and making it a habit in your teenage years - before you're saddled with the adult responsibilities of paying a mortgage or buying groceries - allows you to take full advantage of compounding interest.
The key is to start now and let time work in your favour. After all, as the old investing adage goes, it's "Time in the market, not timing the market".
Here are some basic concepts and tips for a teen to learn about when it comes to saving and investing.
What is compounding interest?
Compounding helps grow your money by earning interest not just on your original investment (or principal), but also on the returns you've already earned. Essentially, you're earning interest on interest. Think of it like a snowball rolling down a hill - it starts small, but as it keeps going, it picks more snow and grows bigger and bigger over time.
Imagine you invested $100 from your allowance or your salary from your part-time job as a babysitter. Over time, your investment gives you a little money, say $5, just for keeping it there. Once the next round of returns rolls in, you won't just earn interest on the $100 but on the full $105, meaning you might get $5.25 this time.
This goes on and on and eventually turns your $100 to a couple thousand dollars.
The person who starts earlier benefits more from the compounding effect than the one who gets in the game later, even with a bigger investment, assuming their interest rates stay the same. Don't believe it? Just look at the table below.
| Person A: Started investing at 16 years old | Person B: Started investing at 30 years old | |
|---|---|---|
| Principal and monthly investments | $1,000 initial; $100 monthly | $5,000 initial; $300 monthly |
| Interest rate | 5% | 5% |
| Money by age 60 | $200,596 | $273,057 |
While Person B has more money by the time they turn 60 due to larger principal and contributions, the teenage investor's earlier start allowed their much smaller investments more time to grow through compounding.
Had Person B started as early as Person A with the same principal and monthly contributions ($5,000 and $300), their money would have grown to $622,152 instead.
The late investor missed out on almost $350,000 in investment earnings. Time is money, indeed.
Savings accounts are a popular method to see compounding interest in action. Interest on savings accounts in Australia is often calculated daily and paid monthly, meaning your interest compounds every month.
How to get teens started on investing
"One of the first steps for a teenager interested in investing is to understand the importance of investing early and how it can pay off later," loan management platform founder and parent Michelle Lomas told InfoChoice.
However, it appears, that teenage Aussies don't prioritise investing.
The InfoChoice State of Aussies' Savings Survey released in July 2024 revealed nearly half (48.9%) of Gen Z (1997-2012), the age cohort that teenagers are part of, have a whopping $0 invested in any growth assets, excluding property and super.
Of those Gen Z with at least a dollar invested, an overwhelming majority prefer to put their money in shares (61.9%) more than the relatively riskier investments like cryptocurrency (23.8%). This perhaps indicates their risk appetite or their preference for cash savings.
Alternatively, since the survey also found that one-fifth of Gen Z only have less than $1,000 in savings, teens don't invest because they likely don't have much in the way of funds in the first place.
However, going back to our point earlier, even a snowball can make a huge avalanche. So start rolling.
Unfortunately, though, lack of funds is not the only hurdle deterring teens from investing.
"Many adults, myself included, were never taught how to manage money or invest wisely from a young age, and this knowledge gap can have long-term consequences for financial well-being," said Isabelle Charter, co-founder of kids' investing app Drip Invest.
According to Ms Charter, letting teens have real-life exposure to investing helps them understand the risk-reward relationship firsthand, make regular saving versus spending decisions, learn to manage the emotions of market fluctuations, practice patience, and discover their risk tolerance and investment preferences.
Drip Invest co-founder Isabelle Charter shares her insights into investing for teens on the Savings Tip Jar podcast.
Different investment options for teens
Before you start investing, you need to determine your risk tolerance. Can you handle significant risks in exchange for potentially more lucrative returns or do you want to stay on the safe side for smaller yields?
Once you get a sense of your risk tolerance, research the investment vehicles you believe suit your goals. Teens can begin investing in a variety of options tailored to young investors.
Share market
Share market investing, also known as stock market investing, involves buying a small ownership stake in a publicly listed company through a stock exchange. This makes you a shareholder.
A share can potentially generate returns through capital gains when its value increases from the time you buy it to the time you sell it. This typically happens when the company performs well and increases its profits and market share. The prices of shares can also fluctuate based on supply and demand, typically influenced by the company's performance, market conditions, and investor sentiment.
Another way you earn from this growth asset is through dividends. Some companies pay dividends as a way to return some of their earnings to their shareholders. Mature, stable companies like large banks and mining companies that generate consistent profits are more likely to pay dividends. As an investor, you can opt to re-invest the dividends or keep them for yourself.
Australian-based shares are listed on the Australian Securities Exchange (ASX), and can be bought through brokerage firms and trading apps.
Exchange-traded funds (ETFs)
Similar to shares, ETFs are investment funds traded on the stock exchange. However, unlike investing in a single company like with share market investing, you're putting your money in a basket of different assets. This may include a mix of stocks, bonds, or other securities.
For example, an ETF that tracks the ASX 200 includes shares from the top 200 companies listed on the Australian Securities Exchange. This means that with a single purchase, you're spreading your investment across a broad swath of companies, reducing the risk compared to investing in just one or two stocks.
Many ETFs go beyond Australia, and also invest in overseas shares. Some offer a particular theme, such as tech stocks. Popular ETF providers include Vanguard and iShares. You can browse these websites for the list of ETFs on offer.
Once you're ready to put in an order, ETFs can be easily purchased through online brokerage platforms, similar to single shares. The main attraction to ETFs is they are a low-maintenance and low-cost way to access a wide range of shares.
Bonds
Bonds are a type of debt investment where you loan money to a company of government in exchange for regular fixed-interest payments and the return of your principal at the end of the term. This growth asset is considered low-risk compared to shares - governments rarely go bankrupt - and as such, typically offers lower returns.
Teens looking for a steady income stream and capital preservation may check Australian Government Bonds (AGBs) and corporate bonds for options. However, the barrier to entry is high, usually with minimum investments exceeding hundreds of thousands of dollars. Consequently, many ETFs offer exposure to corporate and government bonds.
Managed funds
Managed funds, aka mutual funds, pool money from multiple investors to invest in a diversified portfolio of assets that includes stocks, bonds, properties, and other securities - similar to exchange-traded funds.
However, unlike ETFs, managed funds are overseen by a professional fund manager or a team of managers who make all the investment decisions on behalf of the investors. As such, you can be hands-off and leave the management of your assets to experts. However, this active overseeing typically comes with higher fees when compared to passively managed ETFs.
Micro-investing apps
Micro-investing platforms, such as Raiz or Spaceship, provide an easy and low-cost entry point into investing as they usually require very little money to get started. It could be more suited for teens who have limited funds and want to gradually build an investment portfolio without pesky brokerage fees.
These apps allow users to invest small amounts of cash, typically by automatically rounding up everyday purchases to the nearest dollar and investing the spare change. For example, if you buy a coffee for $3.50, the app will round it up to $4 and invest the extra 50 cents on your behalf. This will then be invested into ETFs or other diversified portfolios.
As it always is, convenience comes with a cost. Micro-investing apps typically charge fees, either a flat monthly rate or a small percentage of the invested amount. When expressed as a yearly percentage, these can work out to be much more expensive than ETFs.
In addition, with these apps, you technically don't own the shares. Rather, you are investing in a trust that then owns the shares on your behalf. This differs from shares and ETFs, which in Australia are CHESS-sponsored meaning there is a paper trail of you owning that stock.
Real Estate Investment Trusts (REIT)
If you're interested in growing your wealth in the property market, but don't have the capital and know-how to finance an income-producing real estate, you can consider investing in REITs.
REITs or real estate investment trusts are structured as companies that pool the capital of multiple investors to purchase and manage property assets. Investing in a REIT allows you to own a piece of real estate without having to buy, manage, or maintain the property yourself.
In addition to potential capital gains, shareholders receive a regular income - generated from the rent and profits from property sales - in the form of dividends.
Cryptocurrency
Cryptocurrency is a digital currency that can be bought, sold, and traded online. Highly volatile and speculative, prices of crypto investments can rise or fall rapidly within short periods. For example, Bitcoin has experienced significant price swings that resulted in multiple instant millionaires, with its value skyrocketing to record highs and then plummetting in short timeframes.
On the other hand, history is only written by the winners, and countless others bought in at the top only to lose all their money.
Another vital consideration is that cryptocurrencies are prone to cyber-attacks, and once your virtual wallet is hacked, it can be challenging to recover the lost funds. Crypto markets are also less regulated, which can make them more susceptible to fraud and market manipulation.
Given crypto's highly volatile nature, they are more suitable for teens willing to take on significant risks and can afford to lose the money they invest. Be sure to do your research and see to it that you understand the market and the virtual coins you're buying, and consider only placing a small portion of your funds into crypto.
How to invest as a teenager
Teens who start investing early can take better advantage of compounding effect.
Basically, if you want to invest in shares, you need to buy them via a brokerage firm. If you want to invest in an ETF, you need to research the company offering that ETF, and then buy it through a brokerage.
If you want to micro-invest, you need to open an account with that platform and link your bank account.
If you're interested in opening an investment account and are under 18, you will need to seek help from your parent or guardian to help you set up a custodial or joint account. Under-18s cannot be an outright owner of a regular brokerage account.
With a custodial account, the adult manages the investments on your behalf until you reach the age of majority when you can finally take over the official ownership. Alternatively, a joint account allows you and an adult to share ownership of the assets, although a parent-minor setup is typically rare.
Here are some popular brokerage firms in Australia:
| Brokerage firm | What is it | Custodial and/or joint account? |
|---|---|---|
| SelfWealth | An online brokerage firm known for its flat-fee structure that charges low commission per trade, regardless of the trade size. The platform allows trading in both Australian and US stocks. | ✅ Custodial accounts are available ❌ No joint accounts |
| CommSec | A well-rounded brokerage service by Commonwealth Bank Australia (CBA) where investors can buy and sell Australian and international shares, ETFs, options, and managed funds. Its micro-investing app CommSec Pocket enables young and beginner investors to start with as little as $50. | ✅ Custodial accounts are available ❌ Joint accounts are only available for two adults |
| Spaceship | A micro-investing platform where small amounts can be invested regularly. Its managed fund aspect means teens don't need to actively manage their investments. | ✅ Custodial accounts are available ❌ No joint accounts |
| Raiz | A micro-investing app popular for its round-up feature, where it automatically rounds up everyday purchases to the nearest dollar and automatically invests the difference. | ✅ Custodial accounts are available ❌ No joint accounts |
| CMC Markets | A well-established brokerage enabling access to Australian and international shares, ETFs, and derivatives. A minimum fee is charged per trade, and frequent traders can benefit from lower costs due to its tiered pricing structure. | ❌ Custodial accounts are not available for teens, but parents can open and manage an account for their kids ❌ Joint accounts are only available for two adults |
| Stake | Offers commission-free trading in US stocks, making it an ideal option for cost-conscious investors looking to access the US markets. | ❌ Custodial accounts are not available for teens, but parents can open and manage an account for their kids ❌ No joint accounts |
| eToro | A global trading platform known for its social trading network where users can copy the trades of top-performing investors. This can be a great learning tool for teenagers. | ❌ Custodial accounts are not available for teens, but parents can open and manage an account for their kids ❌ No joint accounts |
These are correct at the time of writing and are subject to change.
Top investing tips for teens
Learn investment basics
Understanding the basic concepts like the compounding effect and the types of growth assets such as stocks, bonds, mutual funds, and ETFs (exchange-traded funds) is crucial. Never put money into something you don't understand. Fortunately, there are plenty of resources tailored to beginners you can read and digest before you invest.
That said, don't just believe anything you see or hear, especially from online content made by self-proclaimed 'fin-influencers' who may be leading you down the wrong path.
"With financial literacy not consistently taught across the Australian curriculum, Gen Z often turns to influencers and content creators without validating their credibility," said Katrina Samios, CEO and director of Financial Basics Foundation, an organisation advocating financial capability among young Aussies.
"While obtaining financial advice online offers convenience, it often lacks credibility and personalised insight, making it potentially unreliable and generic," she cautioned.
Instead, Ms Lomas said, teens should seek advice from family and trusted friends who have experience. And if you are seeking enlightenment online, consult credible and trusted sources. Check their credentials and whether or not they have a solid investment background.
Additionally, consider looking at the ASX for free courses if you're keen to invest in shares.
Start saving
Before diving headfirst into investing, start by opening a high-interest savings account (if you don't have one yet). Investing comes with risks, the main one is the possibility of losing some - or all - of your money, especially if you invest in risky instruments. That's why it's essential to have adequate cash saved in case of a rainy day.
Having an emergency fund gives you a safety net during market downturns or in case you incur potential losses. Savings accounts are an almost risk-free way to start your investment journey as you won't lose your capital - all bank deposits in Australia are backed by a $250,000 government guarantee.
Developing the habit of saving also gives you a solid foundation for investing regularly.
Steer clear from 'get-rich-quick' schemes
It pays to be sceptical, especially in things where money is involved. If an investment 'opportunity' sounds too good to be true, it most likely is. Investments promising to grow your money by 50% fast are almost always a sham and most likely a scam.
Although you can afford to be risky because you're young and have time on your side, think twice about investing in speculative assets and enrolling in questionable online courses. Best to stick to tried-and-true investments like stocks, bonds, and ETFs.
Diversify your investments
Don't put all your eggs in one basket, because once that basket turns over, you might be left with just cracked shells and yolks on the floor. Spread your money across different types of investments to reduce risk. Consider a mix of stocks, bonds, and ETFs, rather than putting all your cash into one speculative lithium company some influencer on TikTok told you was hot.
"It's crucial to comprehend that some investments are riskier than others. Fortunately, there are numerous resources available to help understand the risks and rewards of different types of investment strategies," Ms Lomas said.
If you have no idea which companies or industries to invest in, start with those you know, i.e. the brand of shoes you wear or the provider of your streaming services. Familiarise yourself with financial statements, and determine whether they are profitable and established enough to survive inevitable economic downturns. Then pick the ones you like to build your portfolio!
Get help if needed
In addition to assisting you with legal requirements with opening brokerage accounts, you can also ask your family for guidance in choosing investments, managing risks, and setting financial goals. They might also have experience with things like taxes and important aspects of investing you're not familiar with yet.
On the other hand, if you're a parent intent on encouraging your kids to invest and develop a healthy financial mindset, Ms Lomas advised demonstrating the same values and practices around money you wish them to learn.
"When they are younger, this can be as simple as going to the grocery store with a set amount to spend and discussing how different selected products fit the budget. As they age, share how you budget for a holiday or a new renovation," she said.
"As their understanding grows, you can include more complex discussions on how to invest and how investing works, be it in stocks, property, crypto, or other forms."
Invest consistently
Make investing a habit, even if it's a small amount each month. Remember, time and consistency are keys to long-term success.
To make it easier, set up automatic transfers to your investment account so you don't miss making your monthly investments or procrastinate when markets are uncertain.
Additionally, automating your investments with regular, equal contributions takes advantage of dollar-cost averaging. Investing smaller amounts regularly can help offset any short-term bumps in the share market, rather than waiting to invest a larger chunk of cash.
Reinvest your earnings
Instead of taking the cash payouts or dividends from your investments and spending it on a new shiny gadget or the latest shoe release, consider reinvesting to take further advantage of the compounding effect.
Reinvesting increases the number of shares or units you own, effectively increasing your holdings and the future dividends and interest payments you will receive. Your earnings generate even more earnings!
Stay focused on long-term goals
Markets go up and down in the short term. However, the stock market has historically moved upward in the long term. Even though it might feel alarming to see the value of your investments decrease, note that this is expected and often followed by periods of recovery and growth.
Remember that investing is a long-term journey. If you panic in periods of market volatility and offload your investments during a downturn, you're likely selling at a lower price than what you originally paid. But if you stay calm and invest with a long-term goal in mind, you are likely to see growth in the long run.
An earlier version of this article was written by Sarah Brown
In-text photo by Freepik
