Best index funds for teens to consider
Short answer
The best index funds for teens are those that are simple, low-cost, and track a broad market like the S&P 500, offering a way to grow money steadily over time. These funds help young investors learn about the stock market safely while building savings for the future.
What is an index fund in simple terms?
An index fund is like a big basket that holds tiny pieces of many different companies all at once. Instead of buying one company’s stock, you buy a small part of many companies together. This basket follows a list called an "index," which is just a way to pick which companies go inside. For example, an index might have 500 of the biggest companies in the United States. When the companies do well, the basket’s value goes up, and you can make money by owning part of it.
Think of it like collecting stickers. Instead of getting just one kind of sticker, you get a pack that has many kinds mixed together. If some stickers are popular, the value of your pack grows. This helps reduce risk because if one company doesn’t do well, others might do better.
How does an index fund work? (With a kid-friendly example)
Imagine you have $100 to invest. Instead of buying a toy from one store, you decide to buy tiny pieces of 100 different toys from many stores. If one toy breaks or isn’t fun anymore, you still have 99 other toys that might be great. This is how an index fund works.
Here’s an example: a teen puts $100 into an index fund that follows the S&P 500, which means it includes 500 big companies. If the value of these companies grows by 10% in a year, the $100 becomes $110. But if some companies don’t do well, the fund still earns money from the others, so your investment is safer than picking just one company.
Why should teens care about index funds?
Starting to invest in index funds when you’re young gives your money more time to grow. This is called “compounding,” where the money you earn also starts earning money. For example, if a teen invests $20 a month, over several years, the money can grow much bigger than just saving it in a piggy bank.
Investing teaches teens how money can work for them instead of only working for money. It builds good habits and understanding of saving for goals like college, a first car, or future adventures. It also helps teens learn patience, as investing is about the long term, not quick gains.
What terms do people confuse with index funds?
People sometimes mix up index funds with mutual funds or ETFs (exchange-traded funds).
- Mutual funds: These are also baskets of stocks, but often managed more actively, which means someone picks which stocks to buy and sell. This can cost more money.
- ETFs: These are like index funds but trade on stock markets like a single stock. They are often low-cost and flexible to buy and sell.
- Savings accounts: These keep your money safe but don’t grow much.
- Stocks: These are shares of a single company, which can be riskier than owning many companies at once through an index fund.
Knowing these helps teens and parents pick the right investment tool.
What are some good index funds for teens to consider?
When choosing index funds for teens, look for these features:
- Low fees: Index funds charge a small percentage of your money to manage the fund. Lower fees mean you keep more money.
- Broad market coverage: Funds that track big indexes like the S&P 500 or Total Market Index.
- Easy to buy: Available through popular brokerages or investment apps that allow small investments.
Some examples parents might consider (note: check current fund details before investing):
| Fund Name | Tracks Index | Why It’s Good for Teens |
|---|---|---|
| Vanguard Total Stock Market ETF | Entire U.S. stock market | Covers many companies, low fees |
| Schwab S&P 500 Index Fund | 500 largest U.S. companies | Simple, widely recognized index |
| Fidelity ZERO Total Market Index Fund | Total market, no fees | No fees, good for small investments |
These examples are starting points. Parents and teens should research or talk to financial advisors to pick what fits best.
How can parents and teachers help teens start investing in index funds?
Parents can open a custodial account, which is an investment account managed by an adult but owned by the teen. This helps teach responsibility while keeping control within the family. Some banks or brokerage firms offer teen-friendly investment accounts with low minimum deposits.
Teachers can introduce lessons on how money grows through investing and encourage saving money regularly, even small amounts, to invest. Talking about real-life goals, like saving for college or a first car, makes investing relatable.
Here are some steps parents and teachers can take:
- Explain what investing is and how index funds work.
- Help set up a custodial or teen investment account.
- Encourage teens to start with small, regular contributions.
- Review investments together and talk about how the market changes.
- Teach patience and the importance of long-term thinking.
What should teens do next to get started with index funds?
If a teen wants to start investing, here’s what to do:
- Learn more: Read kid-friendly guides about index funds and investing basics.
- Talk with parents or guardians: Discuss goals and how much money to invest.
- Open an account: Parents can help open a custodial brokerage account or a teen investment account.
- Pick an index fund: Choose a low-fee, broad market index fund.
- Invest small amounts regularly: Even $10 or $20 a month can grow over time.
- Keep learning and watching your money grow: Investing is a journey, and understanding the market helps make smart choices.
This process helps teens build good money habits for the future.
Frequently asked questions
Can kids open an index fund account by themselves?
Usually, kids under 18 cannot open investment accounts on their own. Parents or guardians typically open a custodial account, which they manage until the child is an adult. This helps protect young investors while teaching them to manage money.
Is it safe for kids to invest in the stock market?
Investing always has risks, but index funds reduce risk by spreading money across many companies. Starting young with small amounts and using a custodial account can make it safer and educational.
How much money do teens need to start investing in index funds?
Many index funds allow starting with small amounts, sometimes as little as $50 or $100. Some apps let teens invest even smaller amounts, making it easy to start with pocket money.
What if the stock market goes down?
Stock markets can go up and down. Investing in index funds is best for long-term goals because the market usually grows over many years. It’s normal for values to drop sometimes, but staying invested helps money grow over time.
Are index funds better than saving money in a bank?
Index funds usually offer higher growth potential than a bank savings account but come with more risk. Savings accounts are safe but grow slowly. Combining both can be a smart way to save and invest.