Learning Financial Skills for a Lifetime

If your son or daughter is home from college or out of high school for the summer, it’s possible they will be among those young adults who join the seasonal workforce. Whether they are temping in an office, or watching over beachgoers from a lifeguard stand, their summer earnings are something they should be proud of. It’s also a great time for them to learn about money management and saving for the future.

Your 16-year-old daughter, who is making minimum wage scooping ice cream, may not want to hear about tucking money away for retirement. Yet, there’s no better time than when she begins to comprehend how much effort goes into earning money to discuss the benefits of smart financial planning. Helping your child to understand the difference between short and long-term financial goals, and how to achieve both, can empower them with valuable life skills.   

Short-Term Goals

Oftentimes, short-term goals can be considered “SMART.” This commonly used acronym stands for Specific, Measurable, Achievable, Realistic and Timely.

Is your child saving to buy a car?  To pay for next semester’s books?  To go to a concert with their friends?

These are specific goals that can likely be accomplished in the short term with planning and saving. This is arguably an easier goal for a teen because it is clearly defined and it’s simple to measure progress. As your son sees the balance in his bank account growing, he will know he is closer to getting the keys to his new car. He can look at classifieds and know that soon he will be behind the wheel of one of those vehicles. While he works toward earning this money, he is learning to save.  The same applies to getting those concert tickets or paying a specific school bill.  Hopefully, as your child can achieve their goal, it will be a satisfying experience that will form the foundation for a new habit.

Long-Term Goals

The value of long-term goals can be harder to impress upon a teenager who feels like retirement is a hundred years away.  Most likely your child hasn’t even begun working in their career field.  Why would they begin to consider planning for decades from now?

Time is on their side!  

Roth IRA

With the current market downturn, it can be an excellent time to consider establishing and funding a Roth IRA for your child. Although your son or daughter may not realize it yet, there is great value in saving at a young age and allowing for compounded interest to grow! This type of retirement account allows for tax-free growth and can help your child achieve a variety of long-term goals. 

You can open a custodial Roth IRA on behalf of your minor child and serve as manager of the account until your child is eligible to assume control. In most states, this is when he or she reaches age 18.  

Your child can make Roth IRA contributions up to the lesser of his or her earned income in 2022 or $6,000. Or you can help your child fund the account to the maximum allowable amount, provided you do not contribute more than your child’s earnings for the year.  For example, if your daughter earns $2,500 at the ice cream shop, you can contribute $2,500 to her Roth IRA but cannot exceed the amount she earned.  This may also be an account a grandparent wants to help fund.

Though a Roth IRA contribution is not a deduction (subtraction) on their tax return, anyone with earnings less than $12,000 will pay zero federal income taxes.  However, it’s important to remember that states have different thresholds and there can still be a state tax liability, even though there is no federal tax liability. There may be a federal tax on unearned income for dependent children which should be reviewed separately. 

Roth IRAs have other benefits that go beyond saving for retirement, and some of these may help your child sooner rather than later. Provided that certain criteria are met, withdrawals can be made to help pay for qualified education expenses or to assist in purchasing a home. Additionally, all appreciation within a Roth IRA is never taxed, and can be withdrawn without a penalty once your child reaches age 59 ½ (or earlier under certain conditions).

Learning to Invest

Another path to help your teen understand the ways their money can grow in the long term is to discuss investing. They can invest in cash, diversified exchange-traded funds (ETFs), mutual funds or even individual securities. You might have a child who is environmentally or socially conscious and would be interested in learning more about ESG (environmental, social and governance) investing. What is key is opening a dialogue to begin showing your son or daughter the types of options and tools they will have available to make smart financial decisions with their hard-earned money.

If your teenager is working for the first time, they might be reluctant to even talk about saving their paycheck. They may want to spend that money the minute they have it. However, if you can get them to compromise and put aside a portion for their current and future goals, they will certainly benefit in the long run.  If you’d like more information, please contact us.