Immediate gratification, lack of information, and lack of discipline have forced many of you into a tardy start with several missed financial opportunities. This mindset probably started young. Think back to when you graduated from high school: How much graduation money did you receive? I got roughly $900 cash that I was allowed to spend. Surprise, I spent it on crap!
Hindsight being 20/20, I would have saved that money in a Roth IRA (I had a job also). The benefit of a Roth is that after age 59½ the money can be withdrawn tax free provided that it has been in existence for at least five years. Now, if I never added any additional contributions (just the $900) and I am assuming that this investment would average eight percent over time, by the time I would have turned 65, I would have seen a return on my high school graduation money of just over $38,000.
This return factors the ups and downs of the market. One year you may earn 12-15 percent and another year you may earn only five percent, over time anticipating an average of eight percent. Now that is serious compounding, and like long-term investment time is your best friend.
Many graduation parties are underway and monetary gifts for the new graduate are a common congratulatory offering by friends, family and well-wishers. Encourage your teen to be wise with their windfalls. This generation can change the future generations by getting a jump on their relationships with money. Good habits are much easier to adopt at age eight or 18 rather than 38. Not only will there be a much lasting effect, but also your children will have real potential to create lasting wealth.
As you begin to think about summer plans, vacation to relatives, camps, and college in the fall, sending your teen away with cash is very scary and incredibly inconvenient. My oldest has gone away every summer since high school freshman year, too young for a checking account/Visa check card and not ready to take on the responsibility of consumer debt with a credit card. After summers and summers of insane out-of-state ATM fees, enough was enough. Online bank ING began offering the MONEY card, which is designed for teens — love it! For the younger child, they offer a kids’ savings account (www.ingdirect.com).
Don’t make money and the cost of living a foreign or scary concept to your children. All ages can benefit from and practice good habits. One day they will leave the nest, and how comforting it will feel knowing that you provided your little darling(s) a solid foundation in financial acumen.
Consider the following:
1. Let children practice managing small amounts of their own money with a weekly or biweekly allowance or stipend.
2. Whether you’re running a business or working a nine-to-fiver, let your children see you in action and how you make money.
3. Talk early and often about college cost and how you’ll pay for it. This encourages your child to have a vested interest in their future.
4. Teach kids to divide up money into spending, saving, and giving categories. Let them spend their money and learn that they have to save for larger ticket items. They will experience wasting money and making wise purchases.
5. Give children a hands-on education about stocks, bonds and/or mutual funds. Open a custodial investment account, and let them pick companies they are interested in learning more about and purchasing stock in.
6. Teach teens to responsibly use debit and possibly credit cards. A spending journal is great for teens to track where their cash goes.
7. Reward their discipline to save and give them a percentage match monthly or quarterly. They will really see their savings grow and motivate them to continue.
8. The moment your kid gets a job, have them open a Roth IRA. They must have earned income to open this account. Earned income can also come from the family business if you hire your kid. Check with your tax advisor for the specific requirements and guidelines.
Freelance writer, financial consultant, entrepreneur and mom, Tamela Saulsberry brings a combined 16 years of experience in business, finance, sales and coaching. She is delighted to receive your questions and feedback. She can be contacted at [email protected] or 612-269-2341.