In the summer months, many teens, with dollar signs in their eyes, are planning to join the ranks of the employed. In 2003, 60.9 percent of individuals age 16 to 24 got summer jobs, according to the U.S. Department of Labor Statistics. While your child may be ready to sink those newfound funds into a hip wardrobe or a new car, you have a unique opportunity as a parent to teach your teenager some lessons on financial responsibility. Here are a few ideas to help your child make the most of their summer funds.
Have Some Fun – While you would ideally like your teen to save every penny they earn so they can potentially experience a comfortable future on their own dollar, you also know how important it is for them to enjoy the fruits of their own labor. Working hard all summer and not spending any of the money they earn can quickly erode a teenager’s sense of purpose when it comes to a summer job.
You can however, help your teen spend their funds constructively by establishing a budget together. Determine a dollar amount they can spend on entertainment, clothing or food each month. This is a good way to show them they can still enjoy their cash even if they save a portion of it, and it creates healthy habits for when they do move into the dorm and you can’t supervise every dollar they spend.
Save for College – This is probably the most obvious choice for your teen’s summer funds. After all, they should be the biggest beneficiaries of their savings. Teens can contribute to a 529 plan* or Coverdell Education Savings Account that a parent or guardian has established in their name. Keep in mind that for the Coverdell ESA, a $2,000 annual contribution limit per beneficiary applies.
Another option is to establish a custodial savings account. You would have control over the account until your child reaches the age of termination (which varies from state to state, but usually ranges from ages 18 to 21), but they could still deposit funds into it. Besides teaching good savings habits, your child could use this account to save for educational needs besides tuition, such as a computer or dorm room supplies. As long as your child spends the money in the account before applying for financial aid, the funds won’t be counted against him or her as money that could be used to pay for school expenses, including tuition.
College savings plans can also be a benefit to you, because many allow you to deposit funds for the benefit of your child that accumulate tax deferred. You also get the benefit of tax-free distributions if the funds are used for qualified expenses. Non-college related withdrawals are subject to income taxes and an additional 10 percent penalty on earnings. There are various rules and restrictions that apply, depending on the type of plan you are considering.
Save for Retirement – It is tough to think of retiring when you are 30, much less when you are 16, but money from a summer job can be a good seed from which to grow a retirement fund. Besides setting a solid example for future paychecks, setting aside even $25 a week for retirement can truly benefit your child in the long run.
For example, if your 16 year old invests $25 a week from their paycheck and they continue to do so until retirement at age 65, they will have saved over $745,000, assuming an annual return of eight percent**. That might be a compelling argument to get your teenager to forgo two trips to the fast food restaurant in exchange for the possibility of a more comfortable retirement.
It is important to keep in mind that if your child is under the age of 18 most investment accounts require a guardian until the child reaches the age of majority.
Summer jobs can be a wonderful learning experience that can teach teens about the ways of the working world. Take advantage of having your teen – and their funds – under your roof by setting good budgeting examples and helping them save for their future. If you would like to receive the A.G. Edwards’ publication, “Systematic Savings Programs – Giving Your Money the Opportunity to Take Root,” please contact financial consultant, Shelley Phillips-Mills in Bangor at 1-800-947-5456.
This article was provided by A.G. Edwards and Sons, Inc., Member SIPC.