Teaching money management in adolescence pays off for parents, children

KATHLEEN LYNN
Knight Ridder Tribune Business News
July 6, 2004

It's time for teenagers to start their summer jobs - an opportunity to not only make money, but also to learn how to manage it and save it for the future. With that in mind, here are a couple of ideas for parents and young earners:

You worry about your kids. You worry about your retirement. Should you worry about your kids' retirement?

Oddly enough, the answer may be yes. Never mind that your teenage daughter is barely out of braces; you can give her a big boost toward a comfortable old age.

You can do this by opening a Roth individual retirement account for your teen - and now's the time to think about it, as summer-job season begins.

A Roth IRA allows workers to put aside up to $3,000 a year in retirement savings that grows tax-free. As long as it's taken out after age 59½, the fund's earnings are never taxed.

Let's say your 16-year-old makes $1,000 this summer as a camp counselor. She probably wants to spend that money on clothes, movies, and fast food. Or maybe she's the responsible type who wants to save some for college.

Either way, she probably doesn't want to tie it up till she's retired.

That's where Mom and Dad come in. You can use your money - or the child's other savings - to open the Roth IRA in an amount equal to the child's earnings (as long as it's not more than $3,000).

Say your daughter opens a Roth IRA with $1,000 invested in a stock mutual fund (preferably no-load, or no sales fee). If it makes 8 percent a year, that $1,000 will be worth more than $30,000 by the time she's 59½. (Obviously, her retirement account will be much larger if she keeps contributing through her working years, as she should.)

A teenager with a steady paycheck is ready for a checking account, said Philip Heckman, director of youth programs at Credit Union National Association Inc.

"Many, many financial institutions are recognizing that you cannot wait till someone is 18 and they'll magically know everything there is to know about their new financial privileges and responsibilities," Heckman said.

With that in mind, I recently took my 17-year-old to the bank to open a checking account. This way, he can have his camp counselor's salary directly deposited into his account.

And since he'll have to learn how to manage a checkbook at some point, I figure he should start when he can have his parents looking over his shoulder.

"It's something that can help them realize that their money is limited," said Elizabeth Schiever of the National Endowment for Financial Education in Denver, which created a financial-planning curriculum for high school students.

You may have to call around a bit to find a bank that will open a checking account for a minor. The first bank I tried wouldn't do it. And even the bank that agreed to give him a checking account wouldn't give him a debit card because he's a minor - though Heckman said some banks or credit unions will give both debit and credit cards to minors.

I'd much rather see a teenager's first plastic be a debit card rather than a credit card. When students start college, they're typically bombarded with offers for credit cards. I've interviewed many college students who quickly ran up $1,000, $5,000 or even more in debt.

With a debit card, however, students can have the convenience of plastic without the ability to spend more than they have.

Patricia Brennan, a financial educator with Rutgers Cooperative Extension, advises parents to help teens find free checking and low fees.

Heckman said overdraft protection might be a good idea as a safety net, as long as the teen understands budgeting.

"You don't want to see them relying on it as a routine means of avoiding balancing the books, checking the statement, and making sure they have an accurate record of the current balance," he said.

The Credit Union National Association offers an online lesson plan on the basics of checking accounts. It teaches how to make out a check and balance a checkbook, and answers the burning question: "How can I be overdrawn when I still have checks left?"

The lesson plan is available by clicking on "Youth Education" at www.cuna.org. tens, teens, twenties

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