Contrary to most advice here.
Forget about saving your money.
Instead, I would recommend you start investing as soon as you can. No matter how little or how much money you have now.
Let’s say you are 15 years old at the moment, and that you commit to investing $1,000 every year.
That’s close to nothing. It’s just upwards of $80/month.
And you do that for the next 50 years at a 10% return annually.
Guess how much you would have in your investment account when you are 65 years old.
USD$1,280,299
Let that sink for a moment.
That’s almost 1.3 Million Dollars.
You were able to turn $50,000 ($1,000/year * 50 years) of your own money into well over a Million USD.
How’s that possible?
Thanks to compound interest.
The more time you have, the more compound interest can help you grow your money.
But if you wait until you are older to start to invest… you might not be able to benefit from such exponential growth.
Let’s say you wait until you are 25 years old to start investing instead of starting at fifteen.
Who cares? You are still starting at a young age. In fact, you are starting off before many Americans do.
You decide to put in the same $1,000 a year for the next 40 years (until you reach 65) and get the same 10% return.
Guess how much your investment account would be worth after those 40 years.
USD$ 486,852
That’s about 2/3 less than if you started at 15.
Are you now convinced that you need to start investing as early as you can?
Great!
So what’s the best way for you to start investing?
In my opinion, by opening a ROTH IRA account.
A Roth IRA isn’t a type of investment in itself, but it’s an account for holding your investments.
Just like in a brokerage account, in a ROTH IRA account, you can pick where you want to invest your money.
You can buy anything from stocks to bonds, to mutual funds.
But the main benefit of a ROTH IRA is that you have to pay ZERO TAXES on any money you make from your investments.
To be exempt of the capital gains tax, the only thing you would have to do is wait until you are over the age of 59 1/2 to withdraw your gains.
If you wish to withdraw them earlier, you would be subject to pay taxes on your gains, just as you would do in a regular brokerage account.
As of 2019, you are allowed to contribute up to $6,000 of after-tax money every year to your ROTH IRA, as long as that money comes from earned income (not gifts).
Now let’s switch our first example and work with those numbers.
Imagine can put $6,000 every year into a ROTH IRA from age 15 until you are 65, and that money grows at 10% every year.
If you can do that, your account would grow to USD 7,681,796 over those 50 years.
And ALL of that money is TAX-FREE, you have to pay ABSOLUTELY NOTHING on taxes once you withdraw it.
Does that sound too good to be true? Does it sound like a scam?
Well, let me be the bearer of good news.
It’s REAL, and it’s not a scam.
You can check the IRS website and read on about it for yourself: Roth IRAs | Internal Revenue Service
So how do you open and set up your ROTH IRA?
If you are over the age of 18, most investment brokerage companies will allow you to open a ROTH IRA on your own. Just do your research online, find the best that suits you and create your account online.
If you are younger than 15, some investment brokerage companies will allow your parents to open a CUSTODIAL ROTH IRA for you.
In this type of account, your parents or guardians will have to make the actual trades for you, and they will retain management control over the account.
However, you can be part of the investment process. You can create a portfolio allocation and select asset classes and even specific investments.
And once you reach the legal age in your state, the account’s ownership will convert to you.
If you are curious about how custodial ROTH IRA’s work or if you want to learn other ways to start investing as a teenager, I suggest you watch the video I created this week.
It’s like investing 101 form teenagers.
Let me know in the comments below if you knew about Custodial Roth Ira’s and make sure you share this answer or the video with a young person who might need to read this.
Thanks for reading!
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