The job of a fiscally savvy parent is far from complete once the kids have developed a healthy piggy bank habit. If you’ve been assuming that investing is a matter to take up during the post-graduate years, think again: Your teenager could become a millionaire by retirement with a little help getting started saving money right now.
You already understand the power of compounding interest and long-term growth; now it’s time to pass on that knowledge to your teens. Investing is a game for the long term, and time is an asset teenagers have plenty of.
Not too early for an IRA
Many parents don’t realize that there is no age requirement to open an IRA. As long as teens are earning their own incomes — even babysitting, mowing lawns and chores around the house count, as long as the income gets documented as it’s earned and reported to the IRS — they can begin contributing to an IRA. You can even make the IRA contributions yourself, as long as you don’t exceed your teen’s earned income.
Think this sounds like small potatoes? A teen who starts saving $2,500 a year in an IRA starting at age 15 (perhaps with a little help from you and the grandparents) and then boosting those contributions to the maximum of $5,500 per year after age 23 would be sitting on more than $3 million at age 67, given an 8% interest rate. That sounds like a mighty comfortable retirement!
Smart savings for teens
An early start equals a smart start for young people with years ahead for their money to grow. Your teen could be taking advantage of these strategies for saving right now:
- IRA An Individual Retirement Account offers young people less flexibility than a Roth IRA.
- Roth IRA A Roth IRA is more versatile for teens, who can withdraw from it for any reason (college tuition, a down payment on a house or car) at any time.
- Employer-based retirement plans Show your teens how a having their employer match whatever they put into an employer-based retirement plan (a 401(K), 403(B) or 457 plan) essentially means free money — they’re getting an infusion of money into their savings they wouldn’t be getting at all if they weren’t making retirement plan contributions.
- 529 and Coverdell savings plans These plans are specifically designed to save for college expenses.
- Emergency savings Help your teen get a handle on all of life’s unexpected emergencies: a stolen bike, a lost textbook, or a flat tire. Teach kids how to plan to save three to six months’ income for emergencies, and help them set a smart savings goal while they’re still getting started.
For young people who need to learn how to balance all of life’s attendant risks, investing offers an avenue for personal (as well as financial) development. “You can start with as a little as $20 and can invest for many reasons — for the challenge, for the sense of owning something, or for the more practical purpose of making sure you have enough money in the future,” writes Kara McGuire in the new book The Teen Money Manual: A Guide to Cash, Credit, Spending, Saving, Work, Wealth, and More.
The big numbers and rules-heavy world of savings tools and investments can intimidate even the most conscientious teens. But if you sit down with your kids early on to help them see the value of starting to save money right now, they’ll discover that the early bird truly does catch the worm.