where to put teen's initial $1k?

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Iorek
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Joined: Fri Mar 08, 2013 9:38 am

where to put teen's initial $1k?

Post by Iorek » Sat Jan 12, 2019 10:09 am

My teen has been saving on a small scale for a while but was just given a lump sum gift by a generous relative and we thought it would be a good occasion to sit down and talk about the benefits of long-term investing in the stock market. I thought I'd ask what advice others have on this idea, both on the mechanics and on the investment itself.

On the mechanics, I assume I need to open a UTMA custodial account. From my brief investigation it seems Fidelity would be much better for a low dollar investor than Vanguard (and probably also that Schwab)-- lower minimums, no account maintenance fees, etc.

On the investment, we'll talk about the role of the time horizon in asset allocation and I think we'd suggest investing for a long horizon (in theory the money might get used in 10-15 years but I think we'll assume it's being invested for 20, 30, or more). I tend to think mutual fund shares are better than ETFs for someone whose future savings is likely to occur in small increments, so my inclination is just to go for a total mkt index fund (FZROX).

I guess an alternative to consider would be a target date fund (e.g., FDKLX, which seems like it's a pretty static 63% total market, 27% int'l, 10% fixed income for the next 20 years). That would have slightly higher fees (.19% vs 0) but makes it easy to incorporates int'l and offers the chance to talk about the role of bonds.

Any advice from someone who has BTDT (or someone who hasn't)?

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ruralavalon
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Re: where to put teen's initial $1k?

Post by ruralavalon » Sat Jan 12, 2019 10:33 am

Iorek wrote:
Sat Jan 12, 2019 10:09 am
My teen has been saving on a small scale for a while but was just given a lump sum gift by a generous relative and we thought it would be a good occasion to sit down and talk about the benefits of long-term investing in the stock market. I thought I'd ask what advice others have on this idea, both on the mechanics and on the investment itself.

On the mechanics, I assume I need to open a UTMA custodial account. From my brief investigation it seems Fidelity would be much better for a low dollar investor than Vanguard (and probably also that Schwab)-- lower minimums, no account maintenance fees, etc.

On the investment, we'll talk about the role of the time horizon in asset allocation and I think we'd suggest investing for a long horizon (in theory the money might get used in 10-15 years but I think we'll assume it's being invested for 20, 30, or more). I tend to think mutual fund shares are better than ETFs for someone whose future savings is likely to occur in small increments, so my inclination is just to go for a total mkt index fund (FZROX).

I guess an alternative to consider would be a target date fund (e.g., FDKLX, which seems like it's a pretty static 63% total market, 27% int'l, 10% fixed income for the next 20 years). That would have slightly higher fees (.19% vs 0) but makes it easy to incorporates int'l and offers the chance to talk about the role of bonds.

Any advice from someone who has BTDT (or someone who hasn't)?
If the teen has a part-time job with at least $1k in annual earnings last year or this year, then opening an IRA and contributing the $1k gift to the IRA is the way to go. The teen can contribute for tax year 2018 anytime before April 15, 2019.

I suggest an account at Vanguard, investing in a Vanguard target retirement fund or Vanguard STAR Fund (VGSTX). Both have initial minimum investments of just $1k.
Last edited by ruralavalon on Sat Jan 12, 2019 10:37 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

sparksfly
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Re: where to put teen's initial $1k?

Post by sparksfly » Sat Jan 12, 2019 10:36 am

Iorek wrote:
Sat Jan 12, 2019 10:09 am
so my inclination is just to go for a total mkt index fund (FZROX).
That's exactly what I did. They have a long life in front of them. A total stock fund makes sense...no expense fee and no minimum makes it best suited in my view.

jym
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Joined: Wed May 02, 2018 9:00 pm

Re: where to put teen's initial $1k?

Post by jym » Sat Jan 12, 2019 10:52 am

Everything you described is very sensible. If your teen has earned income, talking about IRAs might be more important than asset allocation details.

There's a separate behavioral lesson you might consider. How do you look at your regular savings account balance which has suddenly ballooned to $1000, and simply choose not to spend it? For some kids, this is harder than just 'knowing' you're not supposed to spend any money from the special investment account your parents set up for you. This is more closely related to budgeting and emergency funds than investing; but you know best what lessons/skills are most important right now for your teen.

NotWhoYouThink
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Re: where to put teen's initial $1k?

Post by NotWhoYouThink » Sat Jan 12, 2019 12:21 pm

It would depend on what other access to funds they had. If the teen was headed to college and not working (maybe heavily involved with ECs, for instance) I would forget the Roth IRA (the only kind of IRA appropriate for a teen, I think) for the time being, and talk about budgeting and planning for future expenses. Car, gas, clothing, entertainment, etc.

It's all well and good to talk about the wonders of compounding, but most of us managed to get our savings kicked off by starting in our 20s, some people in their 30s and others in their 40s.

For a teenager, I'd just keep it in a custodial checking account. That's what we did. Kids got an allowance through high school because we thought their ECs were worth more to them long term than the kind of jobs they would have been able to get. From that allowance, plus gifts they got from family, they paid for their gas, clothes, entertainment, etc. They learned saving, budgeting, the pain of running out of money and waiting for the next payment.

They stayed in school and got good jobs and now live below their means and do their own saving and retirement account funding. They'll be fine.

MotoTrojan
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Re: where to put teen's initial $1k?

Post by MotoTrojan » Sat Jan 12, 2019 1:29 pm

ruralavalon wrote:
Sat Jan 12, 2019 10:33 am
Iorek wrote:
Sat Jan 12, 2019 10:09 am
My teen has been saving on a small scale for a while but was just given a lump sum gift by a generous relative and we thought it would be a good occasion to sit down and talk about the benefits of long-term investing in the stock market. I thought I'd ask what advice others have on this idea, both on the mechanics and on the investment itself.

On the mechanics, I assume I need to open a UTMA custodial account. From my brief investigation it seems Fidelity would be much better for a low dollar investor than Vanguard (and probably also that Schwab)-- lower minimums, no account maintenance fees, etc.

On the investment, we'll talk about the role of the time horizon in asset allocation and I think we'd suggest investing for a long horizon (in theory the money might get used in 10-15 years but I think we'll assume it's being invested for 20, 30, or more). I tend to think mutual fund shares are better than ETFs for someone whose future savings is likely to occur in small increments, so my inclination is just to go for a total mkt index fund (FZROX).

I guess an alternative to consider would be a target date fund (e.g., FDKLX, which seems like it's a pretty static 63% total market, 27% int'l, 10% fixed income for the next 20 years). That would have slightly higher fees (.19% vs 0) but makes it easy to incorporates int'l and offers the chance to talk about the role of bonds.

Any advice from someone who has BTDT (or someone who hasn't)?
If the teen has a part-time job with at least $1k in annual earnings last year or this year, then opening an IRA and contributing the $1k gift to the IRA is the way to go. The teen can contribute for tax year 2018 anytime before April 15, 2019.

I suggest an account at Vanguard, investing in a Vanguard target retirement fund or Vanguard STAR Fund (VGSTX). Both have initial minimum investments of just $1k.
To go further, it should be a Roth given its tax-free at such low (part time) income anyways.

Topic Author
Iorek
Posts: 1057
Joined: Fri Mar 08, 2013 9:38 am

Re: where to put teen's initial $1k?

Post by Iorek » Sat Jan 12, 2019 1:33 pm

Thanks all.

Teen is a year or two away from having wage income. Currently gets an allowance (and smaller gifts from relatives) which are (hopefully) teaching the everyday budgeting lessons; already has a decent amount of savings (maybe $1k) put aside in a bank account. We figured it would be a good idea to do something different with this windfall to introduce the idea of long term savings and equities.

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ruralavalon
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Re: where to put teen's initial $1k?

Post by ruralavalon » Sat Jan 12, 2019 1:35 pm

MotoTrojan wrote:
Sat Jan 12, 2019 1:29 pm
ruralavalon wrote:
Sat Jan 12, 2019 10:33 am
Iorek wrote:
Sat Jan 12, 2019 10:09 am
My teen has been saving on a small scale for a while but was just given a lump sum gift by a generous relative and we thought it would be a good occasion to sit down and talk about the benefits of long-term investing in the stock market. I thought I'd ask what advice others have on this idea, both on the mechanics and on the investment itself.

On the mechanics, I assume I need to open a UTMA custodial account. From my brief investigation it seems Fidelity would be much better for a low dollar investor than Vanguard (and probably also that Schwab)-- lower minimums, no account maintenance fees, etc.

On the investment, we'll talk about the role of the time horizon in asset allocation and I think we'd suggest investing for a long horizon (in theory the money might get used in 10-15 years but I think we'll assume it's being invested for 20, 30, or more). I tend to think mutual fund shares are better than ETFs for someone whose future savings is likely to occur in small increments, so my inclination is just to go for a total mkt index fund (FZROX).

I guess an alternative to consider would be a target date fund (e.g., FDKLX, which seems like it's a pretty static 63% total market, 27% int'l, 10% fixed income for the next 20 years). That would have slightly higher fees (.19% vs 0) but makes it easy to incorporates int'l and offers the chance to talk about the role of bonds.

Any advice from someone who has BTDT (or someone who hasn't)?
If the teen has a part-time job with at least $1k in annual earnings last year or this year, then opening an IRA and contributing the $1k gift to the IRA is the way to go. The teen can contribute for tax year 2018 anytime before April 15, 2019.

I suggest an account at Vanguard, investing in a Vanguard target retirement fund or Vanguard STAR Fund (VGSTX). Both have initial minimum investments of just $1k.
To go further, it should be a Roth given its tax-free at such low (part time) income anyways.
Yes, a Roth IRA will probably be better. I assume the teen might be in the zero tax bracket.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

GmanJeff
Posts: 477
Joined: Sun Jun 11, 2017 7:12 am

Re: where to put teen's initial $1k?

Post by GmanJeff » Sat Jan 12, 2019 4:19 pm

My son started with a target date fund, and later added more specialized funds as he could, a small cap focused fund and an international fund, both actively managed. More recently, we have discussed the capital gains tax issues associated with actively managed funds in taxable accounts, so he could consider that going forward, perhaps pivoting to index funds before his income rises to the point where capital gains taxes will have an impact.

lakpr
Posts: 2487
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Re: where to put teen's initial $1k?

Post by lakpr » Sat Jan 12, 2019 4:19 pm

DCU offers a 6.17% interest on all membership savings acounts, for the first $1000
Perfect for teenager's first account

I am doing this for my two kids myself. Almost stock market like return, for very little risk.

If and when the teen accumulates more money, a Fidelity Zero account would be more appropriate.

If you would rather not play the market, Ally CDs are a great place to start

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