When you are a teenager it is hard to think past this weekend’s plans, especially when it comes to money. I remember getting that Friday paycheck and thinking I was rich, and by Sunday afternoon I felt broke again. If I had only moved a portion of those small earnings to an investment account, imagine the wealth that could have accumulated over the last two decades. As a parent, I am discovering ways that I can help my kids grow up to be a millionaire.
Open a Roth IRA in your child’s name. Anyone earning an income is eligible to participate in a Roth IRA, including children. Instead of trying to convince your 13 year-old to fork over her babysitting money, make the contributions to a Roth IRA for her, up to her earned income. If your son starts his own lawn cutting service over the summer and earns $1,200, open a Roth IRA and invest $1,200 in a low-cost, growth mutual fund. Mutual fund minimums could prohibit a small initial investment, so shop around. You could also pick individual stocks that interest your child and move the account to a Roth IRA later when their earnings increase.
Older teenagers should fund a portion of their Roth IRA with their own earnings. Just like adults, older teenagers should learn the discipline to set aside a percentage of their take home pay for savings. Do not make it too painful initially by setting an unrealistic savings rate – 10 to 20 percent is a good rule of thumb. Encourage your teenager’s savings habits by offering to match their contributions, with the total contribution not exceeding their earned income in that tax year. The balance will grow faster, and your son or daughter will develop savings habits that will carry them into adulthood.