HOW PARENTS CAN BUILD WEALTH FOR THEIR TEENAGER
Three simple tips to achieve long-term financial freedom
Money can be stressful. As we grow into adulthood, finances become one of the principal stressors in our life, and very often the guiding factor behind any number of career or life decisions. In a recent survey, 65% of Americans said finances were their biggest source of stress.
If we’re lucky, we do something we love and earn an income that supports our family and our lifestyle. Most of us aren’t that lucky. Career happiness set aside, for anyone who chooses to become a parent, the desire to provide our children and partners a financially stable life looms large.
The desire to provide our kids with financial stability isn’t just about buying groceries, clothes, and keeping the lights on. It’s about offering our children a rich and fulfilling life. But how fulfilling would life be if our children grew into their adult years with true financial freedom and a path to sustained wealth?
KEY TAKEAWAYS:
Teenagers are uniquely positioned to work, save money, and create longer term financial wealth and freedom
Educating our children to spend consciously will create strong financial habits
Teens can use the fact that they’re young to their benefit and invest in indexes and funds that will grow over time throughout their life
When our teens join the work force, targeting jobs with retirement benefits can accelerate their path to long erm wealth
Working teenagers are uniquely positioned to take advantage of their position in life and build sustainable wealth for the long term. Here are a few things that you can help your teen do right now that they will thank you for in the long run.
CONSCIOUS SPENDING
This is probably the hardest to achieve, because it’s something many of us fail to be mindful of as full-grown adults, and that’s being conscious with how we spend our money. Simply put: don’t buy Starbucks, work at Starbucks. More on the working part later.
Let’s say your kid works a 20-hour work week at $15/hr. After taxes they’re taking home somewhere around $240 per week. Now let’s say we’re stopping at Starbucks on the way to work for $6 a pop (average customer spend is around $5.65) and we’re grabbing lunch on our lunch break for $12. Their take-home from work just dropped by $90 (and that’s only during the work week), netting out around $150. So, between taxes and things that will eventually go into the sewers, half of their money is already out the door. There isn’t so much we can do about the taxman, but if make lunch and coffee at home, we’re protecting 37.5% of our teenage workers earnings. Instead of flushing that money down the toilet, they can use it to build wealth.
INVEST IN AN INDEX
There’s a prevailing theory—the 50/20/30 rule—that 50% of our paycheck should go to living expenses, 20% should go to savings, and 30% should be spent on investing or other personal spending. Obviously, those numbers can vary greatly based on our situation—some people need almost their entire paycheck to get by. But let’s use those numbers to game things out. That 37% that our kid was burning on drinks and Taco Bell? We don’t even have to use all of that to hit our 30% investment number.
This will require a little parental help, but an easy way that your teenager can put that money to work is by investing in an index. In simplest terms, this means they are investing in the market itself, as opposed to an individual stock or fund. Why is this a good idea? Because teenagers don’t have a lot of money, but they have a lot of time. Money grows exponentially over time.
The S&P 500—an index that you can buy/invest in via various platforms—doubles every six or seven years. So, in the scenario above, let’s take $72 per paycheck (30%), we’ll call it something like 45 paychecks a year because everyone isn’t working every single week, and you’re investing $3240 per year into the index. Let’s say your kid is 16 in this scenario. At age 23, that $3240 is going to be $6480. At age 30 it is going to be $12,960—and that doesn’t include any money that’s invested at age 17, 18, 19, etc. All that money is going to continue to grow and earn interest as well. Even if they ONLY saved that initial $3240 from year one of working, by the time they reach age 35—the average age of a first time home buyer—they now have somewhere between $20K and 24K to make a downpayment on their first house.
WORK AT A JOB THAT OFFERS BENEFITS—preferably a 401K.
401Ks are somewhat hard to come by for part-time workers, but they aren’t non-existent. Most of us who work full-time have some idea of what it does, but most teenagers do not.
401Ks and other retirement accounts with employer matching are free money. The teenage worker takes a portion of their paycheck and invests it into a fund or index and the company they work for matches that contribution up to a certain percent. And that match is typically pre-tax, so on our hypothetical teenager above, that’s a percentage of $300 not $240. On the high-end, some of the part-time jobs listed below will match about 6%, but let’s call it 5% to be on the safe side.
Something to note, is that in the 50/20/30 idea above, this would be part of that 30% investment number. So, on every paycheck, your teen puts in $15, and their employer puts in another $15. Same math as above, 45 paychecks per year, invested in a market that doubles every 7 years, we’re adding $1350/year to our retirement. That single year becomes $10,800 at age 37. If we’re working that part time job for 2-3 years, before going off to college or finding other full-time employment, that brings us above $30,000 as our teen approaches age 40. So now, our 16-year-old is sitting on $40-50,000 that they earned from ages 16-19 working at Starbucks. We’re going to assume that they keep working beyond those ages, earning more and putting these habits to work.
Every employer is different in terms of when they start offering benefits and the qualifications to do so, so this isn’t an exact calculation—the hope is to capture the spirit of these habits. Here are a few places that offer good benefits packages where teenagers should be able to find gainful employment:
Starbucks
Trader Joes
Chipotle
JP Morgan Chase
Wal-Mart
Macy’s
Costco
CONCLUSION
In our adolescence, we’re creating the habits that we take into adulthood. If we can educate our kids about saving, conscious spending, and investing their money, these things will become second nature, and as they grow their money will grow with them.
They’ll be able to make life career choices based on what makes them feel fulfilled, as opposed to operating from a place of desperate financial need. This will create security, allowing them to learn more about investing and take calculated risks that will grow their wealth even further.
Everyone’s situation is different, and it is highly recommended that you consult with a trusted financial advisor. But freedom in adulthood from financial stress sounds like a gift worth giving, and all it’s going to cost you is some conversation—maybe a lot of conversation if you’ve got a strong-willed child—and a few extra lunches before your child heads out the door.