How to Invest $1,000 as a Teenager [Investing for Teens] (2024)

If a teenager puts $1,000 in a checking account today and simply waits a few decades, they won’t even break even on the deal. Sure, they’d still have $1,000—but thanks to inflation, that thousand bucks would have far less spending power than it does today.

But a teenager that invests the same amount should have much more money in the future.

If you’re wondering how to invest $1,000 as a teenager, you’re not alone! For one, most people like working with nice, round numbers (like $1,000), and most schools don’t teach kids how to manage money, let alone how to invest.

Today, we’ll help you figure out how to invest any amount—$1,000, $10, whatever you have in your pockets right now. That includes answering important questions such as:

What type of account should I open?
Am I too young to open retirement accounts?
What types of investments can teenagers even own?

By the time you’re done reading this article, you’ll be ready to take all of the necessary steps to start not just investing … but investing with confidence.

How to Invest Money as a Teenager

Roughly half of all teens think investing is only for people with extra money, and nearly a third think it’s only for wealthy people. Those figures are according to Fidelity’s 2023 Teens and Money Study, and we’re happy to let you know that neither myth is true.

In fact, you don’t need to wait until you’ve saved $1,000 or any other large sum before you start investing. That’s because time is on your side! Even small amounts of money can grow substantially given the many decades you have to invest. So whether you have a part-time job, an allowance, or even just received money as a gift, you should put at least a portion of that toward investing for your future.

Also, when you invest as a teenager, you can be far more aggressive than when you’re older because you have so much time to make up for mistakes. But even for most teenagers, a good balance of risk and reward, as well as a focus on longer-term investments, makes the most sense.

As far as “how” is concerned: The two most commonsense ways for a teen to start investing are with a high-yield savings account, an investment account, or both. In both cases, you’ll need the help of a trusted adult to get started—and for some types of investment accounts, that adult will need to be a parent or guardian.

High-Yield Savings Account

One of the simplest ways to start investing is through high-yield savings accounts. You only really have two decisions to make:

Which account provider you want to use
How much you want to deposit

The name says it all: High-yield savings accounts offer substantially higher interest rates than standard savings accounts—their annual percentage yields (APYs) are often 20 to 25 times the national average for traditional accounts. In fact, the difference is so significant that if your current bank only offers standard savings accounts, it’s probably worth it to open a high-yield savings account at another financial institution rather than settle for your bank’s low yield.

The money in these accounts is typically “liquid,” meaning you can withdraw it at any time. That makes it perfect for short-term savings, like earnings from a summer job meant to go toward a car down payment.

When trying to decide among several high-yield savings accounts:

Compare their APYs. The higher the APY, the more interest the teenager will earn on their money.
Compare fees. Fees eat into the money you’re earning, so ideally, stick to an account with no regular fees unless other perks make the fees worth it.
Compare account minimums. You want to invest your money right away. However, if you don’t have enough money to satisfy a minimum balance requirement, you’ll have to wait. So pick an account with a low-enough minimum required balance (or none at all).

And a quick tax tip: If you earn interest from a savings account, the interest is subject to federal income tax, but not state and local. Interest is taxed at ordinary income tax rates.

Investment Account

Opening and managing an investment account is more complicated than throwing money in a high-yield savings account, and it’s a riskier way to try to grow your funds.

However, you have the potential to earn much, much more money. And when you start investing in the stock market as a teenager, time is on your side—the longer you can afford to invest, the greater the potential rewards—and the more educated you’ll be about investing as an adult, when you’re earning more and have more money to invest.

Follow these steps to get started on your investing journey.

1. Determine the best type of account

Teenagers can hold investments in a few types of accounts, all of which require some help opening it from a parent, guardian, or other trusted adult. As part of the process, they’ll need to provide basic identification information such as your Social Security number.

What type of account should you open? We’ll go over the most popular types, and explain their advantages and disadvantages, so you can determine which one makes the most sense for you.

Custodial account

A custodial account (aka “custodial brokerage account”) is opened by an adult, who makes investment decisions in the account on behalf of a teen or other minor. All of the assets legally belong to the beneficiary (the teen), and when a teenager reaches their state’s age of majority (usually 18 or 21), they take control of the account.

Money in custodial accounts can be withdrawn at any time, so long as the funds are used in some way that benefits the minor.

Joint brokerage account

Whereas a custodial account is controlled by an adult for a teen, a joint brokerage account is owned by two or more people—thus a parent and a teen can share an account. Both owners have full control over the account, and both own all the assets in the account.

Also, typically, a joint brokerage account will allow you to invest in anything that the provider allows in its individual brokerage accounts: stocks, bonds, exchange-traded funds, mutual funds, and more.

Money in joint brokerage accounts is “liquid,” meaning it can be withdrawn at any time. However, you will be required to pay taxes on capital gains, dividends, and bond interest generated in the account.

There are no contribution limits for these accounts. Gift tax rules might apply, but these rules can be tricky. So, if you do want to open up a joint brokerage account, ask a tax professional if there are any gift tax implications.

Custodial IRA / Custodial Roth IRA

Just like standard custodial accounts, a custodial IRA or custodial Roth IRA is run by an adult, and the assets belong to the teen or child. However, these are retirement accounts—IRA stands for “individual retirement account”—so the rules differ somewhat.

For one, a teen must have earned income to have a custodial IRA or custodial Roth IRA. A teen can contribute all of their income—or a teen and parent can split the contributions however they want, as long as the teen earns as much as the total contribution—up to the annual contribution limit, which is $6,500 in 2023.

Our take: With very few exceptions, a custodial Roth IRA will be far better for a teen than a traditional custodial IRA. Here’s why:

With a custodial IRA (which is a custodial version of a traditional IRA), the account is funded with pre-tax dollars. The money then grows tax-deferred until retirement, and is only taxed once the money is withdrawn. You’ll trigger taxes and penalties if you try to withdraw the money before then, though you can avoid penalties in a few situations. (More on that in a second.)

Because you don’t pay taxes until retirement, it makes the most sense to contribute to a custodial IRA when you think your tax rate is higher than it will be in retirement—or in other words, it makes sense to contribute when you’re earning a high salary.

However, with a Roth IRA, you contribute after-tax funds, then that money is allowed to grow tax-free until retirement, when those funds can also be withdrawn tax-free. You can also withdraw your contributions at any time without paying taxes or penalties. If you try to withdraw profits before retirement, however, you’ll typically pay taxes and penalties. But again, there are a few exceptions, which we’ll list in a moment.

With a Roth IRA, you’re paying taxes on the money before you contribute, not in retirement. So it makes the most sense to contribute when you think your earnings are less than they will be in retirement. Teens don’t earn very much on average, so a Roth IRA usually makes much more sense unless you’re, say, a wealthy child actor.

As for those exceptions we mentioned? You can avoid an early withdrawal penalty in several situations, including (but not limited to):

Becoming disabled
Unreimbursed medical expenses or health insurance while unemployed
Making a first-time home purchase ($10,000 maximum)
Qualified higher education costs
Qualified birth or adoption costs ($5,000 maximum)
If you’re 59 1/2 or older and have had your account for at least five years (Roth IRA only)

Overall, this is a great retirement savings vehicle that also has some flexibility for other important costs.

2. Open and fund the account

The next part is relatively simple. Once you’ve chosen the account that makes the most sense for your situation, you’ll need to open and fund the account.

A parent will help you with this process. Opening the account will involve an application asking for some personal information, such as your name, address, and Social Security number.

Options to fund an account usually include transferring money from a linked checking or savings account, writing a check, doing a wire transfer, or transferring funds from another broker. That’s when you can put your $1,000 (or whatever sum you’ve accumulated) into the account.

And remember: This is just the initial investment. You can (and should!) add funds to the account as your financial situation allows.

3. Choose your investments

Once the money hits your account, the fun part begins: You get to choose your investments.

Nervous? We get it! Investing can seem complicated, especially when you first start out. So we typically suggest a few steps before you actually pick your first stock or fund:

Individual stock

When you buy an individual stock, you’re buying a tiny fraction of ownership in a company. And typically, if the company does well, your stock will grow in value. But there is risk—if a company doesn’t perform well, your stock could lose value.

If you ask us, stock investing is pretty exciting. You don’t just blindly invest money and hope it grows—you can learn about a company, read about it in the news, and talk about it with your friends.

Mutual fund

A mutual fund is a big pool of money that is used to buy many investments at once. So when you buy into a mutual fund, you’re not buying one stock—you’re buying parts of dozens, hundreds, or even thousands of stocks (or bonds or other investments)! This can be a safer way to invest than buying individual stock.

Let’s say you invest $1,000 in Stock X, and Stock X suddenly loses a lot of value—well, your whole $1,000 investment is at risk. But if you invest $1,000 in a mutual fund that holds Stock X and a bunch of other stocks, and Stock X suddenly loses a lot of value, it will have a relatively smaller impact on your $1,000 because your investment is spread across many stocks, not just Stock X.

When you own a mutual fund, you typically pay an annual fee (taken directly out of the fund’s performance). Mutual funds charge different fees, so you’ll want to compare funds to make sure you’re getting your money’s worth.

Exchange-traded fund (ETFs)

Exchange-traded funds (ETFs) are similar to mutual funds in that they’re diversified (you get to invest in a lot of things at once), but they have some differences. For one, exchange-traded funds trade like stocks—on an exchange, throughout the trading day—where mutual funds only settle once per day, after the trading day.

Also, most (but not all) mutual funds are actively managed. This means human managers are deciding what, and when, to buy and sell. However, most (but not all) ETFs are passively managed and typically referred to as “index funds.” An index is a collection of stocks, bonds, or other investments that are governed by rules determining what can or can’t be included. An index fund simply “tracks” the index by holding what the rules say it can hold.

Index funds tend to be cheaper than actively managed funds, and they often outperform human managers. So, index funds make a lot of sense for teens who want to invest $1,000 across a wide selection of stocks, bonds, and other investments.

Time Is On Your Side—Even With Small Amounts!

When you invest, you benefit from a phenomenon called “compounding,” where your money generates more money—and that money can be used to generate even more money.

Let’s say you invest $1,000 in an account that earns a 4.0% APY. By the end of one year, you would have earned $40 ($1,000 * 0.04%), so your account would have $1,040.

However, if you keep that money in the account for another year, you’re earning 4.0% not on your original $1,000, but the additional $40 you earned. By the end of a second year, you would have earned another $41.60 ($1,040 * 0.04%), bringing your account balance to $1,081.60.

In other words: The more time you have to invest, the more compounding will work for you. So teenagers benefit even more from compounding than adults!

Here’s a practical example, using a high-yield savings account, that shows how time, interest, and contributions affect how much you earn!

Example: High-Yield Savings Accounts Over Time

Two 12-year-old teens—Amy and Brianna—decide they want to save up for a big trip together as a way to celebrate their eventual college graduation, which would happen at age 22.

Starting at age 13, Amy puts $1,000 in a high-yield savings account that earns a 4.0% APY. She adds $50 per month. By the time she reaches age 22 …

Amy has contributed $6,350.
Amy has earned an additional $1.422.99 in compound interest.
Amy’s account total has grown to $7,772.99.

Lower interest rate

Brianna also puts $1,000 in a high-yield savings account at age 13, and contributes $50 every month, but her account yields less—it only earns a 2.0% APY. By the time she reaches age 22 …

Brianna has contributed $6,350.
Brianna has only earned an additional $697.87 in compound interest.
Brianna’s account total has grown to $7,047.87—$725.12 less than Amy’s!

Less time saving

Let’s say that instead, Brianna earns the same 4.0% APY on her account, but she waits until she’s 18 years old to make her first deposit. She starts with $1,000, and contributes $50 every month. By the time she reaches age 22 …

Brianna has contributed just $3,350.
Brianna has only earned an additional $367.74 in compound interest.
Brianna’s account total has grown to $3,717.74—$4,055.25 less than Amy’s!

Less time saving (but contributing more)

Brianna is much farther behind that way! So, what if she starts later but makes much bigger contributions to make up for it? Let’s say Brianna earns the same 4.0% APY on her account, and still waits until she’s 18 years old to deposit her initial $1,000. But after that, Brianna contributes $115 per month in an attempt to catch up. Well, by age 22 …

Brianna has contributed $6,405—$55 more than Amy!
However, Brianna has earned an additional $624.98, which is $72.89 less than what Amy earned in interest.
Brianna’s account total has grown to $7,029.98—$17.89 less than Amy’s!

Brianna came much closer to Amy this way, but only by contributing a lot more per month over a much shorter time period. Amy still has a clear advantage because she started out early.

We’ll note that in real life, the APY wouldn’t stay the same for nine whole years—we kept it fixed to provide a clean example. Still, the lesson still stands: The more time you have to invest, the better your yield, and the more you contribute, the better off you’ll be.

But in most cases, time is your most powerful ally.

Stocks + Similar Investments Work Like That, Too

You can also grow your money like this with stocks and other investments, though their movement won’t be as straightforward. That’s because, unlike savings accounts, which simply compound your interest over time, stocks can go up and down. So, your first few years after investing $1,000 might look like this:

Start of Year 1: $1,000
End of Year 1: $1,100 (+10%)
End of Year 2: $1,045 (-5%)
End of Year 3: $1,128.60 (+8%)

But generally speaking, stocks have a much higher rate of return over the long term, so while the path will be rockier, you’ll typically make much more by accepting that risk.

Frequently Asked Questions (FAQs)

Should a Teen Open a High-Yield Savings Account First?

Because a parent can do the managing of both a high-yield savings account and often must manage the investment account, parents can open up these accounts for their teen in any order.

However, once it comes to getting a minor involved, yes, a high-yield savings account is the ideal first way to invest as a teenager. These accounts are simple to open and manage, performance isn’t volatile (up and down) like it can be with stocks, and your teen can withdraw money at any time, penalty-free. That makes a savings account perfect for short- and medium-term needs (a car, a trip, or anything else that requires money within a few months or years).

Custodial and joint investment accounts are better for longer-term savings. And because investing is more complex, it makes sense to involve a teen once they’ve mastered the basics they’ll learn with a savings account.

Can a Teen Invest in the Stock Market?

Yes, a teen can invest in the stock market—but if they’re under the age of 18, they can’t open an investment account by themselves. So if you’re under 18 and want to invest, ask if a parent or guardian will open an account for you.

If you want to be involved, suggest a joint brokerage account, where you can help make investment choices. If you’re worried about making investment decisions, ask them to open a custodial account or custodial IRA for you—that way, your parent will have the final say in what you invest in, even though you legally own all of the funds.

How Old Do You Need to Be to Invest?

You must be a legal adult (so, at least 18 years old) to open your own brokerage or other investment account. But if you have a trusted adult, you can invest at a younger age.

Any adult can open a custodial account for a minor—while it’s often a parent or guardian, it doesn’t have to be. Regardless of who opens it, however, the minor legally owns all of the funds. The adult only makes investment decisions and can only withdraw funds if they’re used to benefit the minor.

Do They Make Investing Apps for Teens?

Yes, there are investing apps for teens that can help kids learn about important topics such as stocks, bonds, and funds—and bigger concepts such as risk and reward.

Sometimes, these apps even provide teens with a virtual trading account, which they can use to practice investing with fake cash before they’re ready for the real thing.

Is $500 Enough to Start Investing in Stocks?

Like we said before: People love investing with big, round numbers. So, yes, $500 is fine—so is $1,000, so is $10,000, and so is $100,000. But it doesn’t need to be a perfectly round number: If you have $55.72 just lying around, an investment account will be happy to let you use it.

How much money you have can limit your options from time to time. For instance, some mutual funds require a minimum of $1,000 or $2,000 to invest. However, most stocks and ETFs cost less than $500.

One way to stretch your money? Open an account that offers fractional investing. With fractional investing, you can invest as little as $5, and sometimes just $1, in a given stock or ETF. That allows people who even have as little as, say, $50 or $100 start a diversified portfolio of several stocks and funds!

And remember: You can always buy more as you contribute more money to your account.

What Is the Advantage of Investing at an Early Age?

In a word: Time.

Remember the example below? You can find investments with higher returns, and you can always try to contribute more money, but simple time in the market is a powerful ally—especially to teen investors, who have 50 or more years to work with!

That time isn’t just useful for compounding—it also allows you to correct any investment mistakes you might make along the way.

So, now that you know how to invest $1, 000 as a teenager, get out there and grow your money!

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