How to start building wealth from a young age?

Question

NECESSARY INFO

Hi, I'm 15 years old. I just won $1200 from an editing project. I could spend all of the money on things like smartphones and stuff that I want. But I believe it's preferable to be intelligent (like Warren Buffet for example) and start investing and making smart things with my money; so one day those $1200 will have turned in to a much bigger capital. I'm kind of new in this investing area, so...

ADDITIONAL INFO

I have no living costs as of right now, no debts, no credit cards; nothing like that. Also no expenses aside from some things I occasionally buy stuff for myself, but that's all. Thank you.

What do you suggest I do to start building wealth from now?

Answer 1

At your age there are a number of things you can do to build wealth, but not all are traditional investing.

One thing you should think about is investing in yourself - by which I mean doing things to increase your long term earning power. Maybe you should start saving for college, if that's something you might do and if you don't live in a country with free education. Or even learning a simple qualification like a lifeguard can raise your earning power over the next few years. Or take some courses in financial investing - knowing how to invest your future earnings well might get you more money in the long run than putting what you have now in stocks.

Trying out some types of investments like stocks might also be beneficial. Don't do anything that ties up your money for a long time - you are going to have some expenses in the next few years and you want to have your money available.

Answer 2

start investing and making smart things with my money; so one day those $1200 will have turned in to a much bigger capital.

Compound growth is your friend!

I'd put the money in a low-cost mutual fund (most likely one tracking the S&P500) at either Fidelity (fund name FXAIX) or Charles Schwab (SCHG). Both are online brokerages.

Once you have a job and earn enough money, roll the account into a Roth IRA, so the account will grow tax free for decades.

Since you're a minor, your parents will have to open it in your name, probably as an UGMA (Uniform Gift to Minors Act) account.

Answer 3

Something that people have not mentioned is getting a Roth IRA. Since you are so young and made so little, the government won't take you on your income. By putting it into a Roth IRA, you can guarantee that this income will be untaxed for life. Combine the Roth IRA with the other ideas mentioned here to figure something good out for the long term.

Answer 4

Since you have no debt or living costs, investing in the stock market might be a good idea, especially if you hold on to the stock(s) for a long time (since investing in stocks is high risk, but this risk is minimised over long time periods. The dividends from stocks are usually a lot higher than interest on savings accounts that banks offer.

Answer 5

Read The Richest Man in Babylon

Read The Richest Man in Babylon by George S. Clason (1926) first to get an understanding on basic saving principles. Anything after should be based on said principles.

In the book, the author writes exactly about wealth growth. It's written in the form of parables or stories taking place in the ancient city of Babylon so it's really easy reading.

The main points to take away are as follows:

Seven Cures For a Lean Purse

1. Save 10% of your income.
2. Control your expenditures by making a drawing a firm line between necessities and wants.
3. Invest your savings so that they grow on their own.
4. Do not be tempted by promises of quick returns, instead ensure that risks are not too high.
5. Own your own house.
6. Prepare future sources of income for when you are old.
7. Learn more continuously, such that your income grows.

as well as

The Five Laws of Gold

1. Save 10% of your income.
2. Invest your savings so that they grow on their own.
3. Be patient in investment and avoid undue risk.
4. Seek advice from industry experts on investments you are considering.
5. Do not participate in get-rich-quick schemes and do not project your greed into false optimism.

There are several other parables and you might find some of the lessons to be repetitive, but that is mainly because this was published back in the day as pamphlets that were distributed by banks and insurance companies in the United States before they were compiled into a book.

You can find a free online pdf at http://www.ccsales.com/the_richest_man_in_babylon.pdf .

After that, create a portfolio

I can't really give advice that is specific to Colombia, but basically you should divide your savings by risk category. As you are young, you should aim for a portfolio which leans more towards risk than otherwise.

A good breakdown may be as such:

40% - High risk, e.g., penny stocks, hedge funds. Essentially high risk with high returns.

40% - Medium risk, e.g., stocks, bonds, real estate, mutual trust funds. Higher risk than bank savings, higher returns than bank savings.

20% - Low risk, e.g., government bonds, fixed deposits. Low risk, low returns

This spread may shift over time in line with your risk appetite which generally shifts towards lower risk as you get older and your responsibilities increase.

Other considerations

Invest in yourself to learn new skills to increase your earning potential.

If a family member or a friend wants to start a business and can display great business acumen and has a great business idea, get second and third opinions on the idea, and check and double-check that you'll be able to get returns. If you're satisfied, go ahead and invest/loan them the money.

Probably don't spend it all in one place on things you want.

Answer 6

Investing $1,200 now is not going to make a material difference in your future lifestyle. While you might gain some hands on experience by doing it, my advice would be to put it in a high yield savings account. In 3 years, you're either going to work or you're going to college. It's likely that you will need this money to help you on the road to a good income and all of the expenses of adulthood (car, rent, house, marriage, children, etc.).

IMHO, in order to succeed in the stock market, you need some degree of financial literacy. The best place to start is the LIBRARY. Start by reading basic introductory material. Build a sound foundation. As you understand more, seek out books on specific topics that interest you. Read everything that you can that is available here, at Investopedia, the business news, etc.

Initially, some of it will make sense, some will not. If you find something of interest, Google for more depth. Until you're somewhat literate, you won't have a clue what's worthwhile versus what's BS.

Most people new to investing/trading start off learning about equity markets (stocks and ETFs). After that, the next logical step is usually credit markets (bonds) which is the other side of capital structure. Do not even consider derivative markets (options and futures) until you are an experienced investor because they are much riskier and they involve more complicated strategies.

If possible, find a mentor to bounce your thoughts off of. This will help you to work through what you absorb from your reading. If available, find an investment club to attend.

Understanding financial markets is like learning a foreign language. It takes time and effort, something most people don’t want to do and as a result of failing to do so, they often lose their money. Financial markets quickly take the money of the inexperienced and uninformed. There's a lot of junk on the web. Until you learn some of the language, you're going to be cannon fodder.

Good luck.