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WHEN I WAS GROWING up, my mother thought the best way to relieve my boredom during summer vacations was to get a job. She was a valued employee at a local business and she knew the firm was hiring.
I asked if part of the job was to calculate change for customers when they made a purchase. That terrified me. My mother said she wasn’t sure, but that I’d learn to do it if it was required. The thrill of having money to spend outweighed my fear of making change. I took the job and survived the cash register.
That got me thinking about today’s teens taking their first jobs. I read that jobs are plentiful this summer, and there may even be a signing bonus. If they get a job in retail, kids won’t have to calculate change, either. The computer will do it for them.
On top of that, they’ll have other advantages. For starters, they’re unlikely to owe federal income taxes on their summer wages. A dependent child can earn up to $12,950 and pay no federal income taxes in 2022. Social Security and Medicare taxes must typically be paid, however. Seeing those deductions will teach teens a little about the taxes all workers pay.
Fidelity Investments reports that teens know they need to have financial goals. Saving comes up as teens’ No. 2 goal—right after getting a well-paying job. Yet less than half of teens have any savings at all, according to Fidelity’s research.
When saving, a teen might be tempted to take the TikTok money challenge, which involves saving cash in a liquor bottle. The TikTok challenge offers the sense of community and accountability that financial planners say can encourage saving. The idea: Don’t crack open the bottle until it’s full. The liquor bottle challenge, however, does nothing to address inflation. That’s another concept kids need to understand today—that a stash of cash will lose value as consumer prices rise.
With help and encouragement from a parent, relative or family friend, teens might stash some of their summer earnings in an investment account. The gold standard would be a Roth IRA. A Roth account could grow tax-free for life—provided, of course, that they don’t withdraw their earnings before age 59½.
They’d likely need help picking suitable investments. Some good candidates include stock index funds or individual stocks that have a record of paying steadily rising dividends. For non-Roth money, risk-averse teens might try Series I savings bonds.
Teaching children to invest can give them a huge headstart in life. Fidelity makes this easy by offering a youth account for kids ages 13 to 17. It encourages the teen to save, invest and spend with parental oversight, providing hands-on experience along the way. To participate, a parent must be a Fidelity account holder.
As an added incentive for kids, the Fidelity account includes a free debit card with no fees or required minimum balance. There’s also a mobile app linked to Venmo and PayPal. I love the site’s education component.
Since only 27% of young adults understand basic financial concepts—and less than a fifth of teachers say they feel competent to teach personal finance—a financial account like this could be a valuable addition to their education. I also wonder whether some parents might gain a wealth of information—pun intended—as they work with their children.
I opened a Roth account for my daughter with Vanguard in a target retirement fund when she was 17. She contributes $50/month automatically from her bank account, and I match $50/month and will continue to do so until she is out of college and working full time. She currently is 22 and has over $7500 in her Roth account.
The last part of the article reads like a promo for Fidelity. While the youth account might be a good way for teens to learn about investing, I think most parents would like to see a good review of its pros and cons. For example, can teens use the account to invest in bitcoin? Does the education component discuss investing in index funds versus individual stocks?
Sonja, great article—thank you. Our schools truly need to include some basic personal finance instruction in their curricula.
Requiring anyone to work is a challenge…you can’t fix entitlement and/or lazy.
It has been a few years since I helped my children with their FAFSA application but the money in a Roth or other retirement accounts still does not get reported as an asset for college financial aid purposes. I am in the group in favor of chosing a Roth for the young workers.
Sonja, thanks for the terrific and timely article. I’m a big believer in the value of early jobs in forming a person’s character. Unfortunately, ROTH IRAs were just coming along when my sons were moving on to college, and I wasn’t smart enough to recommend opening one. It’s one of the first things I recommend to parents now, especially if the have the resources to fund the account. Many don’t realize that they can fund their child’s account, up to the amount of earned income the child made in a given year, and subject to the maximum allowable contribution. This incentivizes the child to work and save, and allows the parent to pass on some of their wealth in a meaningful way.