Financial Literacy
Unfortunately, most teens know nothing about finances. Because of this, they miss the opportunity to start their money journeys early and on the right foot. Many teenagers will work when they are in High School and college. But most of them don’t know what to do with the money that they make. Even those who don’t work will receive money in gifts, allowance, or other ways. The money comes in, and then it is usually just spent because they have no idea what else to do with it.
I have thought long and hard about teaching my kids about money. How can I make sure they get the guidance they need as they begin to earn their own income. If I am successful, my kids will be well on their way to achieving financial independence. Way before my wife and I did!
There are so many topics to cover when talking about financial literacy for teens. But in this post, I want to focus on the 3 accounts all teens should have.
Savings/Checking
The most basic of all accounts is the Saving/Checking account. This may seem obvious, but I knew so many kids growing up that did not have either. I kept most of my money stored in trophies in my bedroom because I hid it from my brother. And it was easier for me to get it to spend. So dumb!
In our house, we use Greenlight for now. We have had this account for years now. I like it because my kids can use it to earn (chores), save, invest, spend, and give. It also comes with a debit card with many customization capabilities for when the kids are really young. The downside to Greenlight is that there is a monthly fee ($4.99) for me to use it. I do plan on moving them to our local credit union soon.
Whatever you choose, all teens must have an account like this to store their money. They should learn how banks work, which accounts do what and start learning how to save and spend their own money. When they need money or want to buy something, they should start learning what it feels like to spend “their” money vs. being handed money from their parents.
Investment (Brokerage/Roth IRA)
Rule Of 72
When kids are young, the power of compounding is on their side. The Rule of 72 is a way to determine the doubling time of money or anything with a known annual return. To figure out the time it takes your money to double, you take the annual return and divide it into 72. For instance, a 10% rate of return will take 7.2 years, 9% will take 8 years, etc. If you apply this rule to investing and specifically the market, you can see how important starting early is.
The stock market’s average return (S&P 500) has been about 10% before inflation for the past century. A person invested in the market would have doubled their money every ~7 years over that time period. I will use a hypothetical below to show how powerful this can be when you start early.
By age 20, my son has saved $10,000 in an investment account and holds that money in a low-cost S&P 500 Index Fund. Without contributing another dollar, by the time he is 62 years old, his money would have doubled 6 times. It would be worth $640,000.
Now let’s say he chose to wait 7 years to start. At age 27, he put $10,000 into the market using the same fund we used above. That money will now only double 5 times when he is 62 and will only be worth $320,000.
The numbers I used above are using a doubling time of 7 years. If I plug the initial investment of $10,000 with a 10% annual rate of return into a compound interest calculator, the actual numbers are $548,000 and $281,000. Regardless, it is striking to see how powerful starting early is!
Custodial Accounts
Now that we learned why this is so important, the question is, how do you do it. There are many ways to do this, and every day, companies come up with new ones. The most basic and easy to execute are custodial accounts. Custodial accounts are investment accounts where the parent is the account holder for the child until the child turns 18. At which point, the account and everything in it become the child’s property.
My recommendation would be to open a custodial Brokerage Account before your child has earned income from a job. Once they have earned income, then I would open a custodial Roth IRA. This can be done through any brokerage house, including Fidelity, Schwab, and others. Once open, I would recommend keeping it simple and invest in low-cost index mutual funds or ETF’s that mirror the S&P 500 or the Total Market. I have referenced many of these in a prior post that can be found here.
Credit Card
Before you think I am nuts, let me explain. To be clear, I do not want you to give your teenager a credit card. Unless you really trust your 13-year-old with one, then be my guest. I recommend adding your teens as authorized users of one or more of your credit cards.
The reason for this is that they will start building a credit profile and credit history. The cards that they are authorized on will show up on their credit report. Assuming the card owner pays in full and on time every month, the authorized user will benefit from that by building a good credit history. If you are not good with credit cards yourself and have poor credit, DO NOT DO THIS! Your bad credit will become their bad credit, and that is not fair to them.
All of the card companies differ when it comes to age requirements. Many don’t have any requirements, while some range from 13-16. Check with whatever card you use the most to see their requirement and add your kids as early as possible. Having established good credit and a good credit score will help them get cheaper loans early on in their lives and save them thousands of dollars or more.
Here is another great article about adding your kids as authorized users.
Starting Off On The Right Foot
In a journey, starting the right way can smooth the ride. If you are driving from Boston to New York and accidentally go to Maine first, the ride will take a lot longer and be a lot bumpier. Our money journey is no different. Unfortunately, most of us don’t learn about money until we have already made many mistakes. I hope to empower parents to teach their kids about money and help them start the right way. I hope this article is one step toward doing just that.
Are there any accounts that I missed? If so, please add them in the comments below? Do you agree with my 3? If not, please tell me why in the comments below so that we can all learn.
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