2 Ways to Help Kids Invest: It’s Never Too Early to Learn How to Invest for the Future

The sooner children and teens learn the value of investing, the better positioned they will be to build wealth and achieve their financial goals. By starting early, young investors can take advantage of the power of compound growth, which helps their money work harder over time. Understanding investment principles, saving, and managing money is vital for creating a strong foundation for their financial futures. Here are two practical ways to help kids invest—no matter how young they are—starting with the tools available today for teens and kids to engage in investing: the Fidelity Youth App and Roth IRAs for Kids.

Why Start Early?

The key to successful investing lies in time. The earlier you start, the more time your money has to grow. Compound interest—the interest earned on both the initial investment and the accumulated interest—can result in substantial growth over the long term. For example, if a teen begins investing at age 13, saving just $500 a year for six years, they could accumulate a sizable amount by age 25. This early start can help achieve larger financial goals like retirement, buying a home, or even starting a business, with much less need for heavy contributions later in life.

This “time advantage” is a unique benefit of starting investing young, especially when paired with consistent contributions and a diversified mix of investments tailored to one’s goals and timeline. With the right approach, small contributions early on can grow significantly over time. However, it’s not just about saving—it’s about investing wisely.

1. The Fidelity Youth App: Empowering Teens to Invest on Their Own

The Fidelity Youth App provides a fantastic entry point for teens to begin their investing journey. Starting at age 13, teens can open a Fidelity Youth Account—a brokerage account that allows them to make their own investment decisions while parents or guardians retain oversight. Unlike a custodial account, where the parent controls the investments, the Youth Account gives teens full autonomy over their portfolio. However, parents still have access to the account and can monitor its activity to ensure everything is on track.

The Fidelity Youth App isn’t just about managing investments—it also serves as an educational tool. It includes interactive lessons and resources to help young investors understand the fundamentals of investing. This is a great way for them to learn about stocks, bonds, mutual funds, and ETFs in a hands-on, risk-free way. The app also allows teens to practice placing trades, and the process is transparent, with guardians able to track the account’s activity.

The app includes several valuable features that make managing money and learning fun. One feature, Money Buckets, lets teens set aside a portion of any funds they receive into savings goals. For example, if they are saving for a new gadget, the app allows them to automatically allocate a percentage of each deposit into a specific “bucket.” This encourages responsible saving and makes the process of reaching goals feel more tangible.

Other benefits of the Fidelity Youth App include:

• A Debit Card: Teens receive a debit card that offers 5 cents back on every purchase and no ATM fees within the U.S.
• No Fees: There are no subscription, account, or minimum balance fees, making it easy to get started.
• Parental Oversight: While the teen makes investment decisions, parents can still track and guide their children’s progress.

The Fidelity Youth App isn’t just about investing—it’s a tool to help teens become financially literate, which is essential for their future success. The more they know about how money works, the better prepared they will be for managing it as they grow older.

2. Roth IRAs for Kids: A Tax-Advantaged Way to Save for the Future

A Roth IRA for Kids offers another excellent way to introduce children to investing. This type of custodial account allows parents or guardians to open an IRA on behalf of their child, giving the child the opportunity to invest for their future. The key difference between a traditional IRA and a Roth IRA is that contributions to a Roth IRA are made with after-tax dollars, but the money grows tax-free, and withdrawals in retirement are tax-free as well. This is a significant advantage, especially when starting at a young age.

To open a Roth IRA for Kids, the child must have earned income—whether it’s from a part-time job, household chores, or other work. This can include babysitting, dog walking, or even acting in a commercial. As long as there’s a documented income, the child can start contributing to the Roth IRA.

Here’s how a Roth IRA for Kids works:

• Contributions: A child can contribute up to the amount they’ve earned in a given year, with a cap of $6,500 per year (for 2023). Contributions made to a Roth IRA grow tax-free, and the account can be used for retirement, though it offers some flexibility.
• Withdrawals: Contributions to a Roth IRA can be withdrawn at any time, tax- and penalty-free. However, withdrawals of earnings before the age of 59½ are typically subject to taxes and a 10% penalty, unless certain exceptions apply. For example, if the funds are used for qualified higher education expenses or a first-time home purchase (up to $10,000), there are no penalties.
• Financial Aid: One unique feature of the Roth IRA for Kids is that it’s not counted as a student-owned asset for financial aid purposes, which can help with future college funding.

For parents and guardians, setting up a Roth IRA for a child can be a strategic way to help them start saving for their long-term future, especially since the earlier they start, the more time their money has to grow. In the same way that adults use Roth IRAs to save for retirement, kids can use them to ensure they have financial stability when they reach adulthood.

How These Options Benefit the Whole Family

Both the Fidelity Youth App and Roth IRAs for Kids provide powerful financial tools to teach children about investing and saving for the future. By introducing teens and even younger children to the concept of long-term investing, they can start to develop critical money-management skills that will serve them throughout their lives.

The impact of teaching kids how to invest and save cannot be overstated. By starting early, kids can:

• Develop Good Money Habits: They learn how to save, invest, and make informed decisions about their finances.
• Understand the Power of Compounding: The earlier they start, the greater the potential for their investments to grow over time.
• Plan for the Future: Whether saving for education, a car, a home, or retirement, early investing sets the stage for achieving important goals.

In addition, these tools allow for flexibility and parental involvement, ensuring that parents can help guide their children through the complexities of investing while still letting the kids have the freedom to make their own decisions.

Conclusion

Investing doesn’t have to be intimidating, and it’s never too early to start teaching kids how to manage their money. Whether through apps like Fidelity Youth, where they can learn and invest independently, or through a Roth IRA for Kids that helps them save for the future, there are plenty of ways to get children involved in investing. By taking the time to teach your kids about money, you are giving them a gift that will last a lifetime—the ability to make their money work for them and achieve financial independence.