JW’s Financial Coaching Podcast Lesson #87-The best thing to do with money when you’re a teenager

  • Can a teenager invest in an IRA?
  • Better to invest in retirement or in college when a teen?
  • What I recommend doing
  • Quick review of Andy Stanley’s “How to be Rich”
  • Quote of the week

The JW’s Financial Coaching Podcast_87

I learned a lot of lessons in my teens and early twenties. Some of them were good and some not so good. But one of the best lessons I learned was the value of work. Not only did I learn the value of hard work, I also learned the value of relationships, became motivated to finish school and get my degree, as well as learning about money. That is why I was thrilled to receive a question from a listener about their teenage daughter working. The parent wanted to know if and how much their teen could contribute to an IRA. The answer is yes, as long as they had an earned income.

But that got me thinking about if I had to do it all over again, what I would do? Would I invest my money I earned as a teen in a ROTH IRA or save it for college? Considering I have two young boys, they will be facing this in about a decade so I decided to run some numbers and on today’s lesson I share the results and my conclusion on what I would recommend.

For my calculations I made the following assumptions:

  1. Worked for all four years of High School
  2. Saved $2,000 a year in a ROTH IRA or College Plan
  3. 8% annual return
  4. Not advocating going into student loan debt

Based on that assumption, our teen would have about $9,400 saved after they graduated high school. The advantages of having it in an IRA are that you it could keep growing. If that 18 year old doesn’t add another penny to the balance or touch any gains for 42 years, when they turn 60, they’ll have approximately $260,000 saved at 8%. If that investment earned 10% annual return you would have over $600,000. If you just put $9,400 into a ROTH IRA at age 22 and let it grow until 60, that amount would be $410,000 or about a $200,000 difference.

When we use that money for college an interesting thing happens. I did some research and the average tuition for a public state school for the 2014-2015 school year was $9,200 and that drops to $3,400 per year for a 2 year institution. Now that doesn’t include room and board but that prevents the student from borrowing for school for one year. Now it won’t pay for all of school, but by avoiding student loans we are able to start to invest in a ROTH IRA or company 401(K) plan a lot sooner and allow the power of compound interest to work in our favor.

What would I do? I would save the money for college first before I do any investing. It’s really tempting to look at the returns on those investments. But ultimately paying for school out of pocket and getting through without any student loans is the best investment one can make in themselves.

Here are some additional resources I’ve posted in the past about paying for school and investing.

This lesson’s quote is brought to you by Audible.com.

“If you buy things you do not need, soon you will have to sell things you need.” ~ Warren Buffet

Also I give a short review and recommendation on Andy Stanley’s book “How to be Rich”. I read this recently at the beach while on vacation with my family and it really spoke to me on how to handle my money as Christian living in the wealthiest nation ever. You can pick it up on Amazon and if you use the link on the show notes page I will get a percentage of the sale which helps pay for today’s lesson.

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