Across America, teenagers are embarking on their first summer jobs. From scooping ice cream to waiting tables to interning in an office, these members of the younger generation are getting their first taste of making money.
In the heat of the summer months, early impressions of money can take shape along with the thrill of being paid for working. With a little extra cash in their pockets, teenagers may feel that they are in complete control of their destiny. But it’s a good time for parents to consider the money lessons they should be passing on to their children during these summer jobs.
Some parents find that these early jobs can be a great opportunity to impact their child’s long-term relationship with money. They use a simple technique – a matching program whereby they match the amount that the child puts into a retirement plan. This helps shape their child’s money story and financial literacy by teaching basic financial skills.
A recent survey from CreditCards.com found that 1 in 4 respondents said their parents gave them zero money education while growing up. Yet most Americans are aware that the earlier you start saving for retirement, the better. If a child is earning money in a summer job, parents should embrace the opportunity to encourage him or her to explore their options with money.
Engagement Requires Listening
Parents need to be extremely proactive about the child’s first job experience if they want it to fit into a bigger strategy of talking about money. A first step is to set appropriate expectations at the beginning of summer by initiating the discussion on what the child’s thoughts are regarding their earnings. This part of the process requires active listening on the parents’ part.
While this seems straightforward, listening is one of the most overlooked components in assisting with financial literacy. Most young people have a point of view on money and gaining insight into where your child stands on saving and spending is important, especially if the child has any money anxieties. At the same time, parents can open up and discuss their concerns and worries about money.
Creating A Matching Plan
While listening is crucial, parents will likely find that success comes from presenting the child with options rather than simply reacting to their child’s plans for their summer money. Most teenagers are aware that they should save what they are earning. Lecturing them isn’t helpful, but enabling them to feel in control can be hugely beneficial as they develop their relationship with money.
This is where the matching program concept comes in. Every dollar the child funds to a retirement account (e.g., Roth IRA) is matched by the parents. For instance, if the child earns $2,500 over the summer and puts $500 into a Roth IRA, the parent matches with another $500. The power of these funds compounding over decades can really set the teenager on the right path for savings.
Roth IRAs are a perfect retirement account when working with teenagers. While it is funded with after-tax dollars, the funds grow tax deferred and can have a tax-free withdrawal. For most teenagers with a summer job, they easily meet the Roth income limits. Plus, they can easily put the money to work with a target date retirement fund.
Further, the power to start investing early is immeasurable. A child who saves $1,000 for five years from ages 15 to 20 and grows it at a 6% annualized return will have $40,000 in their Roth IRA by age 50.
Connecting with Their Future Selves
Parents should also engage the child in discussions about the future. The ability to emotionally connect with one’s future self improves the likelihood of financial success. In explaining the match, parents want to create a motivation to fund, but they are also helping the child anticipate what they will encounter as an adult when employer matches on 401(k) accounts are available. Parents shouldn’t hesitate to encourage their children to think about who they will be at 40, 50, 60 and 70. By starting to fund retirement as a teenager and maximizing the plan, these parents are connecting their child to their future self.
The Path to Financial Freedom
Using a summer job as a teachable moment is a great way for parents to help their children understand the importance of savings, both for short- and long-term goals, which is key to financial success. A recent Bankrate.com report showed that 24% of Americans had lost sleep over saving enough money for retirement. By teaching children now, parents can help ensure that they will be among those who feel confident about their path to retirement.