Financial literacy is one of the most important tools one can have in life, and many parents feel a responsibility to teach their children essential lessons about investing and saving for the future. It’s never too early to start the educational process, and if your son or daughter recently took on their first job, now could be the best moment to have a talk about how to make the most out of their paychecks.
Realize their potential with an investment returns calculator
One of the best ways to illustrate the concept of investing and the power of compound returns is to play around with an investment returns calculator. There are many such tools online that will allow you to enter the amount you plan to invest each month, the number of years you plan to keep it up and the expected rate of return.
For example, you could demonstrate to a 16-year-old that if he or she begins with a $500 investment and adds an additional $25 a month each month at an expected average annual return of 6 percent, the value of that investment would be over $84,000 by the time they turn 63 years old.
The most important lesson to impart here is the value of starting sooner rather than later when it comes to building up a substantial nest egg, even one funded with modest contributions.
Help them buy their first share of stock
To give your child a practical lesson in the stock market, help them pick out and invest in their first stock.
For children under the age of 18, parents can set up a custodial account in the child’s name, which the child will be able to control upon entering adulthood. It may be a good idea to let your son or daughter choose the company they wish to invest in, since this will likely get them more interested in the process than simply assigning them a random blue chip stock. As long as the amount invested is not especially significant, the process should prove educational, regardless of whether or not it is ultimately profitable.
If the teenager has a job, and the stock is doing well, encourage them to set aside some of their money to buy more shares, or to invest in a second company and begin diversifying their holdings. This process could also put them on the path towards investing in a low-cost mutual fund, which represent a much lower risk than the practice of picking stocks.
Open a Roth IRA for your teen
Retirement may seem like a long way off for someone who hasn’t even finished college, but it’s truly never too soon to start saving.
You can give your child a head start compared to many of their peers by opening a custodial individual retirement account for them. Though there are a variety of options, experts often recommend a Roth IRA, since it allows money to grow tax-free as long as it’s not withdrawn by the account holder until the age of 59 and a half.
Because most brokerages have minimum balance requirements to open accounts, your child may need to wait until he or she has saved up enough money. And since all deposits must come from earned income, rather than gifts, this is one area where your son or daughter can start to experience true independence and personal responsibility as they grow their wealth. Just keep in mind that for custodial IRAs, the child must meet all the same requirements that an adult would, and abide by the same maximum contribution rules. Furthermore, as custodian of the account, you cannot commingle the fund with money from your own retirement accounts, nor can you take any withdrawals, unless they are used for the minor child’s benefit.
The last thing most teenagers are thinking about is what their life will look like in 40 to 50 years. But if they reach retirement age and realize they failed to prepare themselves properly in the past, the regret will be one of the things they can’t stop thinking about. Make sure your child has a bright future by providing him or her with a good education in financial literacy. Visit Trustmark’s online Financial Literacy Toolkit for courses covering everything from managing your money to making major purchases, like buying a car or a home.