Teaching Your Kids to Save Is One of the Best Gifts You Can Give Them
BY: Jeff Supple
“Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.” Most people are familiar with this time-worn adage, or some variation on the theme, and for good reason: there’s a lot of truth in it. The same principle can be applied to finances.
I have a 15-year-old nephew who lives in Maine. Like many teenagers this summer, he was able to take advantage of shortages in the labor market, ultimately scoring a position with a minor league baseball team that paid north of $15 dollars per hour. When it came to money, his primary motivation was to save enough to afford the types of indulgences prized by the typical teenager. As his finance-minded uncle, I had another idea.
I proposed, and his parents co-signed, the following: For every dollar he saved in a Roth IRA, his parents would put in $0.50. By the end of the summer, my nephew had set aside $1,000, and his parents matched his contribution by adding $500.
Here’s where it gets interesting. If this level of savings was continued from age 15 to age 55, my nephew would have $421,172, assuming an 8% average annual return. Without the 50% match, that number shrinks to $280,781. If he waited until age 25, he would only have $185,019 with the match, and $123,346 without it.
I can’t think of a better example to teach young people the importance of saving early, through the power of compounding interest, and prepare them to sign up for their future employer’s retirement plan right away, because this shows the impact of a matching contribution.
Minors cannot hold the IRA directly in their name, but their parents can set up a custodial Roth IRA for them. Contributions can come from any source, but the amount cannot exceed the minor’s earnings up to a maximum of $6,000 (tax year 2021 limit).
If you'd like to discuss your own savings plan, or setting one up for your kid(s), please reach out to me via email or at (608) 849-2706.