Monday, October 24, 2016

Tell Teens To Take More Risk

Teen taking investment risk.

“Wear your helmet!”

“Don’t text while driving!”

“Watch what you post on social media!”

If you’ve parented a teen, I’m sure you’ve dished out some of those classic admonishments — and then some.

Teens are notorious for risky behavior. It comes with the surging hormones and the under-developed frontal lobe.

But there’s one area that teens need to pump up the risk if they’d like to enjoy a healthy future. Investing.

According to recent research featured in the Wall Street Journal, the biggest money mistake people make in their 20s these days is playing it too safe. They think investing in the market is too risky or too complicated.

Most teens I know never get beyond plunking some money in a traditional savings account, if they save any money at all.

Here’s where you can play a life-changing role starting in high school and extending through college. Try this general gameplan:

  1. Help your teen to get a W-2 paying job. We focused on summer jobs with our kids, but don’t be too quick to dismiss part-time work while in school. Part-time work for full-time students has benefits.
  2. Open a Roth IRA account. You can start with a custodial account for kids under 18. I opened ones for my teens at a local Schwab office, but there are lots of options here.
  3. Contribute some earnings. Convince your kid to stash away some percentage of each paycheck into a savings account or a savings card. At the end of the summer or the year, roll the savings balance over to the Roth as an annual contribution.
  4. Get a family match. Match your child’s contributions if you can or enlist a grandparent to help. The matching turns it into a “Family 401(k).“
  5. Invest the contribution. Don’t just let the contribution sit there in cash. This is where it’s time to accept some medium term risk for long term returns. We’re talking decades. Consider a low cost, well diversified, broad market index fund or ETF.
  6. Rinse and repeat through college. Make it an annual tradition all the way through that college diploma.

You’ll struggle to get past step 3 though if you don’t show your teens some serious payoff. You can run some very impressive scenarios in a very simple spreadsheet. Copy mine here, and play with the numbers.

Sample Teen Roth Projection

For example, let’s say your freshman in high school makes over $1,000 this summer (my 3 middle sons averaged $1,775 each summer so that shouldn’t be a stretch), contributes $500 of it to a Roth, gets the grandparents to match, and invests in a total market index fund like VTI. Then suppose your child continues the ritual every year through senior year in college. Assuming an annual return of 7.38% (the current 10 year annualized return of VTI), your child will turn that $8,000 into over $150,000 by age 60 — just from this little “summer student ritual.”

Even better, if that student ritual turns into a persistent habit of maxing out IRA contributions and sensible investing as an adult, your kid will be sitting on well over a million by retirement. Run the numbers in the spreadsheet.

Now that’s a risk your teen can certainly afford to take.

Want to turn these tips into action? Check out


  1. Will share on my Facebook page Emotional Intelligence Tips for Parents. Taking risks builds emotional strength, particularly those that do not involve physical danger.

  2. Thank you for helping to spread the word Katherine!