By Jason Lesh, Managing Principal
As summer quickly comes to a close and kids are headed back to school, many of them with a wad of cash in sitting in the bank, we thought it apropos to share some thoughts on how to encourage the youth in your life to use this opportunity to it's fullest.
Let’s face it, getting a job at a young age is not quite the same now as it was when we were young. Teenagers in the past often engaged in manual labor or local service jobs. I still vividly recall being dropped off by my mother for my first job at Willamette Valley Country Club. I might have been wearing pleated khaki pants but I was busy washing clubs and cleaning up the driving range for minimum wage. In addition to mowing lawns and summer paint crews, there are teen job opportunities in digital fields, remote work, and entrepreneurial ventures fueled by the advancements in technology.
Regardless of those differences though, what remains true is the importance of ensuring the next generation is equipped with financial acumen and a strong work ethic. Working during the summer provides teenagers with more than just extra spending money. It offers valuable life lessons, skills, and financial advantages that can set them up for long-term success.
One of the most effective ways to impart these values is by encouraging teenagers to work during the summer and guiding them to not just save, but to invest a percentage of their earnings in a Roth IRA (Individual Retirement Account). There are several compelling reasons why this approach is beneficial:
1. Developing a Strong Work Ethic & Gaining Real World Experience
Summer jobs at a younger age instill a sense of responsibility and discipline. Young people learn the value of hard work, time management, and the satisfaction of earning their own money. They learn to manage their time, balance work with leisure, and understand the importance of punctuality and reliability. Regardless of the career path they choose, these experiences are invaluable, helping teens develop a strong work ethic that will benefit them throughout their lives.
Summer jobs provide teenagers with exposure to the working world. They develop interpersonal skills, learn how to navigate workplace dynamics, and gain insights into different industries. These experiences are invaluable in shaping their future career choices and enhancing their resumes.
2. Understanding the value of money
Earning a paycheck teaches teenagers the true value of money and a firsthand lesson in financial management. It helps them appreciate the effort required to earn and encourages mindful spending. They learn how to budget, save, and spend wisely. By managing their own money, teens develop a sense of financial independence and responsibility. This hands-on experience is often more impactful than parental lectures or classroom lessons about financial responsibility. This practical experience is a great foundation for making informed financial decisions in adulthood.
A Roth IRA is an excellent savings vehicle for teenagers because of its tax advantages and the power of compound interest. Contributions to a Roth IRA are made with after-tax dollars, which means withdrawals during retirement are tax-free. This is especially beneficial for teenagers, who are likely in a lower tax bracket now than they will be in the future. While the primary goal is to save for retirement, contributions (but not the earnings) can be withdrawn at any time without penalties or taxes. This provides a safety net for teenagers, knowing they can access their contributions in case of an emergency.
3. The Power of Compounding & the Importance of a Long-Term Mindset
Even small amounts saved in their teenage years can grow significantly over time and starting a Roth IRA encourages teenagers to develop a long-term savings mindset. It teaches them the importance of planning for the future and helps them understand the benefits of delayed gratification. This mindset is crucial for achieving financial stability and success in adulthood.
The earlier they start investing, the more they benefit from compound interest. Even small contributions can grow significantly over time. For example, if a teenager contributes $2,000 to a Roth IRA at age 16 and earns an average annual return of 7%, that investment could grow to over $64,000 by the time they are 65, assuming no additional contributions.
These lessons foster a sense of financial responsibility and independence.
How to Get Started
Open a Custodial Roth IRA: Parents or guardians can open a custodial Roth IRA for their teenagers. This account remains under parental control until the child reaches the age of majority.
Match Their Contributions: Consider matching your teenager’s contributions to their Roth IRA. This not only boosts their savings but also reinforces the importance of investing in their future.
Educate About Investments: Teach you teenager the difference between stock, bond and commodity investing. Encourage them to invest in what interests them, but most importantly just get started. If they are unsure they can invest in a stock market ETF or mutual fund.
Set Savings Goals: Help your teenager set realistic savings goals and track their progress. Celebrate milestones to keep them motivated.
Encouraging teenagers to work during the summer and save through a Roth IRA is a powerful strategy for building their financial future. This real-world experience instills a strong work ethic, fosters the understanding of the value of money, while leveraging the benefits of tax-free growth and compound interest. Starting them on this path early can make a significant difference in their long-term financial well-being, can set themselves up for a more secure and prosperous retirement, all while learning the value of hard work and responsibility.
If there is anyone you know or care about who you think might benefit from this information, please feel free to share it with them. As always we welcome your feedback, reactions and critique's. We hope you will find this information valuable and validating! Do not hesitate to reach out to either of us if we may be of any assistance.
Warmest regards,
