By BRIAN HEPP is a financial consultant and (310) 453-0077 or at
NOW THAT THE SCHOOL YEAR HAS ended, your teen may be looking forward to a summer of scooping sundaes at the local ice cream stand, policing the pool as a life guard, or teaching the kids at camp the art of skipping stones. Whatever their source of summer-time income, it is important that they understand the value of their work, the privilege of a paycheck, and most importantly the significance of saving and how it can contribute to a successful future.
After a couple weeks on the job, a teenage worker will most likely get their first pay-check. When this happens, be sure to sit down with your child to explain the ins and outs of the inevitable tax withholding and other deductions that could eat up nearly 30 percent of their earnings. After they get a grasp on this reality, encourage them to open a checking account and give them the freedom they’ve been yearning for. Let them spend. Once they realize how many hours it takes them to afford the latest iPod or designer T-shirt, they may think twice when the next payday comes around.
After your child is armed with a bit more spending sense, help them establish a savings plan. Help them remember that time is on their side. While those first jobs are the beginning of independence and maturity, the youth of their years means the compounding of their cash. They should invest some of their earnings in a tax-deferred account such as a Roth Individual Retirement Account (IRA) as soon as possible. This way, their earnings will continue to compound without the burden of Uncle Sam looking down on every dollar.
They can contribute up to $4,000 per year for 2007 and withdraw the money tax-free when they turn age 59. Although the money is taxed before they put it into the account, it will accumulate tax free for many years to come. While some may think it’s too early to begin funding retirement accounts for your teens, when you look at the numbers you’ll see it’s the best time to start. For example, if your child begins contributing to an IRA this year and contributes $2,000 for the next 10 years, assuming an 8 percent rate of return, they’ll have approximately $31,290. But if they contribute $2,000 a year to their IRA for 20 years, assuming the same 8 percent rate of return, they’ll have approximately $98,845.* Your teen may also want to consider investing in the stock market. Even if they set aside as little as $50 per month, they could invest in a few companies they admire and track each organization’s daily performance in the newspaper or online. With a vested interest in the stock market, your teen will learn a lot about the fundamentals of investing and the potential benefits it may have for their future.
It is never too early to begin practicing solid savings habits. As soon as your child receives that first paycheck, teach them that setting aside even a small amount each week may make a big difference on the road ahead. *This example is for illustrative purposes only and does not reflect the performance of any specific investment.
Originally published in the Santa Monica Daily Press print edition on July 11, 2007. Read the original PDF.