July 05, 2018
If your child or grandchild is getting paid for a summer job, it is an amazing opportunity for you to teach two of the most powerful financial lessons: the value of saving for a long-term goal, and the power of compounding.
I want you to help your child contribute to a Roth Individual Retirement Account (IRA). The rules are that anyone who reports earned income is eligible to contribute to an IRA. If your child is under the age of 18, he or she can be the owner of the IRA as long as there is an adult on the account as a custodian.
You and I both know it’s going to be a hard sell to have a young person put money away for retirement, when they haven’t even started their first adult job. That’s where you come into the deal. I want you to set up a matching contribution program where you chip in. Maybe for every dollar they contribute you will contribute $5. So if a child contributes $250 you will contribute $1,250. That is totally legit, as long as the contribution does not exceed the child’s earnings. The IRS doesn’t care where the contribution comes from, as long as there are actual earnings equal to (or greater) than the amount of the contribution.
You can open an IRA account at a discount brokerage, such as TD Ameritrade, and then you and your child/grandchild can decide what ETFs to invest in. This is another great introduction to an important financial skill. Because this is for the longest of investment goals, I would recommend owning funds that invest in U.S. and international stocks. Every discount brokerage has a lineup of low-cost ETFs you can purchase without a commission, and tools to help you find ETFs that dovetail with your goals.
Then, you can talk about how over time, stocks have delivered the best inflation beating gains, that has averaged 10 percent a year for nearly 100 years. Of course, some years are down – a lot –and others are up. Let’s use a conservative return over 50 years of 7 percent. If they invest $1,500 and it grows at an annualized 7 percent, in 50 years the account will be worth more than $44,000. If they instead wait 10 years to start saving, and they invest the same $1,500 but it has just 30 years to grow, it will be worth only $22,000. That’s the power of compounding!