Kids & Money

I wrote the following column three years ago, but it’s still as relevant as it was back then. And my son still has the Roth …….

At the top of my son’s Christmas wish list this year is a present that Ben doesn’t expect to touch until he retires. When he hunts for it under the Christmas tree, he’ll find it in an ordinary business envelope. Maybe I’ll slap a bow on it so it won’t look like a piece of junk mail.

When Ben rips the envelope apart, he’ll find the opening account statement for his new Roth Individual Retirement Account. Most kids would look at the paper and say, “Where’s the present?” In fact, when Ben has attempted to share the virtues of the Roth IRA with his 12-year-old friends, they look at him like he’s a freak of nature.

You’re probably thinking that the poor kid has been browbeat by his mom, the financial writer, into getting a IRA because it would be good for his financial future. Wouldn’t he rather have an Xbox, an iPod or something else more age appropriate?

Apparently not. The Roth was Ben’s idea. He has listened to me for years talk about the wonders of compounding. So he realizes that someone who starts saving even modest amounts as a teenager, can potentially retire with a sum so large that it could be difficult squeezing it into a Brink’s truck. What also appeals to Ben is that with his money working hard, he won’t necessarily have to. This is perfect for a kid, who would rather walk on stale Halloween candy that remains scattered on his floor than contemplate picking it up. He also likes the idea that he won’t owe taxes on his future fortune if he saves through a Roth.

Obviously, most kids are never going to want an IRA for a present. And a child can’t have an IRA unless he or she has earned enough income to open an account, which I’ll get into a bit later. But every kid, who is at least old enough to brush his or her own teeth, should start learning money basics and begin forming good financial habits. It’s a worthy goal considering the frightening number of young people, who can’t tell the difference between a stock and a bond.  In its latest yearly survey of high school seniors, Jump$tart Coalition for Personal Financial Literacy once again announced that students had flunked the organization’s basic financial test. When the latest crop of seniors were asked what type of investment tends to have the highest growth potential, only 17.2% correctly answered stocks. Most kids thought savings bonds or savings accounts generated higher returns. Oh dear.

Among the 4,000 students taking the nationwide test, 58% of them said they learned most of what they know about money at home. Obviously, the onus is on us parents to provide our children with a firm foundation in money. Here’s some ways to do just that:

Set a good example. It’s only natural for kids to soak up their parents’ attitudes about money. Consequently, one of the best ways to teach your children about the value of saving is by example. Think about it. How much success can a chain smoker expect when warning his kids not to smoke?  Badgering a child not to waste his money on a $100 pair of jeans or a television for his room will have little effect if the parent is a QVC addict.

Dispel money myths. Many kids have crazy ideas about money, which you should tackle as early as ages four or five by asking children about their perceptions about money. You may find that your young kids don’t think money grows on trees, but they do believe ATMS spit out cash magically. It’s the same story with credit cards. Children see you using plastic and carrying home anything you want. They don’t understand what price some parents pay for this easy credit.

Let them see you saving. Kids are more likely to save if they watch you doing it. Let your child, for instance, see you investing for their college years. When my 15-year-old daughter was in preschool, I had her decorate her college-fund account folder with her favorite stickers so she’d know which one was hers. Caitlin’s file folder, which she plastered with shiny hearts, teddy bears and smiling dragons, is still used today. Share quarterly account statements with your child and once they understand multiplication, you can explain how they can calculate how much their college funds are worth.

Check out online financial calculators. My son got hooked on wanting to invest for retirement when he started playing around with Internet calculators. (Type “financial calculators” into Google and you’ll find tons of them.)  The last time he plugged numbers into a calculator, he wanted to see what he’d be worth if he added $1,000 a year to his new IRA for the next five decades, which breaks down to about $83 a month. If he did that, he’d ultimately be worth more than $3.5 million. Nothing like a lot of zeros to get you motivated. He also discovered that if he left his $1,000 Roth alone and never contributed another cent, it would be worth roughly $289,000 in 50 years.

Require children to save for college. My kids have to put 20% of whatever they make from jobs into their college fund. We settled on the amount after my husband and I and the kids negotiated. Making children responsible for part of their college expenses will help teach them financial discipline and, with any luck, make them better appreciate what they’ve helped buy.

Provide savings incentive. Years ago, we started offering to match any money our kids saved for college. When one of them pitches in $25, we kick in $25. You could provide the same match for other worthwhile goals like saving for a computer, a car, some other big- ticket item or, yes, a retirement account.

This is actually how Ben is getting an IRA for Christmas. He had set aside $500 from his soccer refereeing and needed another $500 to open an IRA through Vanguard. (Some mutual fund firms require lower initial contributions.) Thanks to a generous grandfather, Ben got his match. He invested the cash into Vanguard Small-Cap Value Index Fund.  Because small-cap value stocks have been the best performers among all major asset classes since the 1920s, I suggested this index fund for Ben.

While there is no age limit on IRAs, not all kids can qualify for one. A child has to have earned income to open an account. And that money can’t come from an allowance or doing chores around the house.  Ben made more than $1,000 this year so he could sink money into an IRA whether it came from his piggy bank or not. Someone else can fund the IRA but the contribution can’t exceed what the child earned in a calendar year.

Keep reading. If you want to learn more about how you can get your kids to spend and invest wisely, check out the web site of the Institute of Consumer Financial Education in San Diego (

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