By Judith Ward on July 26, 2012
Talking to your kids about money is a good idea at any age. However, the discussion may be a bit more important as they begin their working careers and leave babysitting jobs and lifeguard duties behind. And while spending money is far more attractive than saving it to many teens and young adults, they may surprise you by actually listening to valuable lessons about money.
As a parent, your natural instinct is to want your children to realize their full potential with rewarding careers and financially stable lives. If you've regularly discussed financial matters freely as they were growing up, you already have a head start on approaching them about saving for their financial future.
A good place to begin is to make sure that they understand the "interest on interest" compounding benefit—and how starting early and adding to their investments regularly can significantly ramp up the compounding effect. Also, you'll want them to understand that, although the compounding increases are modest at first, they can dramatically accelerate wealth accumulation over time.
While getting a teen or young adult to fast forward to thinking about their retirement may be a bit of a challenge, emphasize the benefits of opening a Roth IRA now—and how much money they could have when they're retired. Because contributions are made with after-tax income, earnings are free from taxes for withdrawals made after age 59½.*
To put into perspective how their savings could grow over the years, the following chart shows how a young adult who will be retiring in 40 years or so, making an initial contribution of $1,000 and adding $100 a month until they retire, could have more than $250,000 to spend—all tax-free. And a teenager could have more than $500,000 at the time of retirement. That may get their attention!
The compounding example assumes a $1,000 beginning balance, $100 invested each month, and a hypothetical 7% annual return.
Contributions to an IRA are made by the IRA owner. However, you could consider an incentive program for your teen or young adult that means matching $.50 or $1.00 for each dollar they contribute. A matching system can help them understand the value of saving for a financial goal.
Once your teen or young adult understands how much their money can grow, saving can be very exciting to them. It is also an opportunity to teach valuable investment lessons. You can involve them in some of the investment decisions and encourage them to look at the financial statements or track their progress online. It's a great way for them to begin their financial education. And chances are, it will be rewarding for you as well, knowing that you could be giving them a jump-start for their future.
To get started with a Roth IRA visit troweprice.com/weneedtotalk.