Hey, Bill here. As always, thank you for the nice mentions on social media.
Teens are notorious for risky behavior. It comes with the surging hormones and the under-developed frontal lobe. But there’s one area where you need to convince your teens to amp up the risk if they’d like to enjoy a healthy future.
Research shows the biggest money mistake young people make theses days is playing it too safe. Most teens just plunk money in a savings account, if they save any money at all.
Here’s how you can intervene and be a real game changer in your kid’s financial future:
- Help your teen get a W-2 paying job. Summer jobs are great for teens, but research shows part-time work for full time students has surprising benefits too, so don’t rule that out.
- Open a Roth IRA account. I used Schwab for my teens, but there are lots of options here, so shop around.
- The tricky part — contribute some earnings. Convince your kid to stash away some percentage of each paycheck. At the end of the summer or the year, move that savings over to your teen’s Roth IRA as an annual contribution.
- Match your kid’s contributions. Grandparents or relatives might be willing to help here. The tax advantaged Roth account plus the family matching makes this what many people call a “Family 401(k).” Just make sure you stay within all the legal limits and play by all the legal rules.
- Invest. Don’t just let contributions sit there in cash. This is where it’s time for your teen to take some near term risk to gain some long term returns. We’re talking decades here. I like to use low cost, diversified index funds or ETFs for my kids, like Vanguard’s VTI.
- Rinse and repeat through college. Make it an annual family tradition.
Now, you’re gonna struggle to get past step 3 if you don’t show your teens some serious payoff. So it’s time to whip up a little spreadsheet.
Let’s say your high school freshman makes over 1500 dollars this summer (not unusual, my kids did), contributes $500 of it to the Roth, gets the grandparents to match, and invests in VTI. Then suppose your child continues the ritual every year for 8 years through senior year in college. Assuming an annual return of 7.38%, your kid would turn that $8,000 into over $150,000 by age 60.
That’s real money!
Even better, suppose that student ritual turns into a persistent habit after college. Maxing out Roth contributions every year would probably leave your kid sitting on well over a million dollars by retirement. Run the numbers in the spreadsheet and show your teen.
Now that’s a risk your teen can certainly afford to take.
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