When it comes to saving money, teenagers aren’t doing too badly. A TD Ameritrade survey found that 56 percent of teens ages 13 to 19 are actually setting money aside. Of course, that means there’s room for improvement because 44 percent of young people haven’t started saving. But it’s encouraging that more than half of teens aren’t spending all of their money as soon as they get it.
They might need more encouragement, though. It can be tough for teens to save money if they’re not being taught why they should set aside money for the future or shown the best places to stash their cash. Fortunately, there are plenty of ways parents and guardians can help.
Keep reading to find out how to encourage teens to save money and the best ways for them to grow their savings.
Use a Budgeting App to Get Teens in the Habit of Saving
It’s important for parents to teach kids to set aside a certain percentage of the money they get into savings, said Wade Chessman, president of Chessman Wealth Strategies in Dallas. A budgeting app such as Mvelopes can help teens get in that habit. Chessman’s 16- and 19-year-old daughters have been using Mvelopes for years to distribute the allowance they get from him into virtual envelopes for spending in saving. “The budgeting part of it is a skill that’s important for them to have as time goes on,” he said.
Mvelopes Basic costs $4 per month. A free alternative is the GoodBudget app, which also uses the envelope budgeting system and links to a bank account.
Read More: 7 Best Apps to Teach Your Kids About Money
Help Kids Set Savings Goals
Telling teens to set aside a percentage of their allowance or earnings from a job is great. But you need to give them a reason to save so they’ll actually want to set money aside rather than spend it. “I think that teens need to write a list of the things that they want to save for which will serve as motivation to do it,” said Monica Dwyer, a wealth advisor with Harvest Financial Advisors in West Chester, Ohio.
On that list can be things you expect them to pay for – such as a cell phone, car or even college. Letting them know that they have to pay for such things could prompt them to budget using a template or other easy tool so they’ll have the money to buy them.
Look for a High-Yield Savings Account
After introducing the concept of saving, you need to help teens find a place to actually stash their money. A savings account can be an easy way to give teens an opportunity to set aside cash for the future because you can link it to a checking account and set up automatic monthly transfers. However, savings accounts geared toward teens can be hard to find. It can be even harder to find accounts with a decent interest rate. But they do exist.
For example, Capital One’s Kids Savings Account has a 1 percent APY, no monthly maintenance fee, and no minimum deposit and balance requirements. Teens must have an adult on the account because minors can’t open bank accounts on their own. Although the 1 percent APY might seem low, it’s higher than what’s available on most other savings accounts. But check with your bank or credit union to see whether it offers a no-fee teen savings account with a decent interest rate.
Pay Your Teen Interest
Because the interest rate on savings accounts can be low, Bill Dwight gives his children a bigger incentive to save by paying them a higher rate of interest on their savings out of his own pocket. The father of five and founder of the FamZoo prepaid debit card and financial app currently pays his youngest son, who is 16, 0.16 percent weekly on his savings balance – which works out to be about 8.5 percent annually. “I like to offer them an aggressive interest rate that is guaranteed,” he said. That way his kids are more likely to want to save their money than spend it.
Dwight automates his interest payments through FamZoo. For $5.99 a month or $60 for two years, families can get prepaid debit cards that are linked to a primary card that is loaded with money by a parent. The parents can then use the app to transfer money to their kids’ cards and pay interest on balances on cards designated for savings. If parents don’t want to use FamZoo, Dwight said they can simply calculate interest payments on their own and transfer the money from their checking account to their teen’s savings account.
Teach Teens the Power of Compound Interest
Teens will be more likely to want to save if they understand how compound interest will help savings grow faster, said Sam X Renick, a children’s financial literacy expert and creator of the Sammy Rabbit money habit books for kids.
You can show teens how it works by using an online compound interest calculator (search for one – there are plenty). Explain that with compound interest, interest is paid on the amount invested or in savings, as well as on the interest that accumulates.
“Have them do compound calculations repeatedly the same way they might practice an athletic endeavor like shooting 50 free throws a day,” Renick said. “You want them to understand that compound interest works for you when you save and invest.”
Make Matching Contributions
Rather than pay interest – or in addition to doing so – you could offer to match your teen’s contributions to savings. You can match a percentage of their contributions or dollar for dollar.
“If can’t afford to match kids’ contributions, get a relative involved,” Dwight said. When grandparents or other family members ask what to give your teens for birthdays, holidays or graduation, suggest that they offer to contribute to their savings.
Opt for a Roth IRA
If your teens have earned income from a job, they can contribute to a Roth IRA and get a head start on saving for retirement. In 2018, you can contribute up to $5,500 to this retirement savings account or the amount you earned – whichever is the lesser of the two. Money in a Roth can be invested in securities such as stocks, bonds and mutual funds, and earnings can be withdrawn tax-free in retirement.
“Roth IRAs for teens are great savings vehicles not only from a tax perspective but also from a way to create good motivation to continue saving rather than spending it,” said Ian Aguilar, a financial advisor with Capital Analysts of Jacksonville. Parents can open a Roth IRA for their teens and be custodians of the account until their kids turn 18 or 21. Both Fidelity Investments and Charles Schwab offer Roth IRAs for teens that don’t require a minimum deposit to open an account.
Try a Traditional IRA for High-Earning Teens
If your teen is making big bucks, he might be better off saving money in a traditional IRA because contributions are tax deductible. Chessman said he has a client who is a child actress and saves in a traditional IRA to take advantage of its up-front tax break.
Kids have to file a tax return if they earn more than the standard deduction, which is $12,000 for single filers in 2018. If kids contribute to a traditional IRA – up to a maximum of $5,500 — and claim a deduction, that deduction can help reduce their taxable income.
Consider a Custodial Brokerage Account
Your kids still can invest in stocks or mutual funds even if they don’t have earned income. You can open a custodial brokerage account for them at a brokerage company such as E-Trade. Because it’s a custodial account, you control the assets until your kids reach age 18 or 21. But they can give you the money to invest, and there’s no limit on the amount they can invest – as there is with an IRA.
Be aware, though, that assets in a child’s name can affect financial aid eligibility.
Use an Investing App
There are lots of great investing apps, but typically you have to be at least 18 to open an account, Dwight of Famzoo said. But the Stockpile app makes it easy for teens to invest because it offers a custodial account that is simple for parents to set up, he said. Dwight uses the app with his 16-year-old son.
Invest in Index Funds
Whether your teens invest through a traditional IRA, Roth IRA or brokerage account, the best investment for them is likely an index fund or exchange-traded fund, Dwight said. An index fund tracks the performance of a market index such as the S&P 500 and gives you instant diversification because you’re basically investing in a collection of stocks rather than just one stock. An ETF also can track the performance of an index but can be bought and sold like an individual stock.
Dwight is teaching his son the difference between betting on an individual stock versus an index fund or ETF. They bought shares of Vanguard Total Stock Market ETF through the Stockpile app and are tracking the performance against an individual stock – Chipotle. “That’s a fun way to get teens engaged,” he said. And, so far, the Vanguard ETF is doing better than the Chipotle stock.
Read More: 15 Stocks for Beginners to Try
To help teens boost their savings, Dwight recommends encouraging them to be entrepreneurial. The more money they make, the more they can save.
“The best options for earning cash is doing stuff around the neighborhood,” he said. Websites such as Nextdoor.com – a social network for neighborhoods – can be used to find out if your neighbors need help with odd jobs. Or encourage your teens to get creative. Dwight said one of his artistic kids used CafePress.com to design and sell t-shirts and mugs with his cartoons on them. Chessman said one of his daughters makes jewelry and plugs the money she makes from selling it into savings.
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