How should teens handle their summer-job money?
NEW YORK (Reuters) - Anchorage, Alaska, teen Grace Bolt isn't spending her summer lolling at the pool or in front of a video game controller - she's juggling a variety of jobs and cashing a variety of paychecks.
The 16-year-old works at her family's two United Parcel Service stores, does filing at a medical billing office, and will be a food vendor at the Alaska State Fair starting in late August.
Not only that, but like every Alaska resident, she gets a check worth roughly $1,000 from the state government every year - her share of the state's natural resources income.
All of that means Bolt has the wonderful problem of figuring out what to do with her money. She makes $8.75 an hour at the UPS stores, $10 an hour at the billing office, and expects to bring in around $3,000 over the course of the state fair.
A typical teen might be tempted to blow it all on electronic games or pop idol posters, but Bolt has bigger plans. She saves 10 percent from every pay period, tithes another 10 percent, and banks her entire check from Alaska.
"I was raised with parents who believe in saving a portion of your earnings," says Bolt. "Now I do it automatically, even though I don't have a plan for that money yet."
Just allocating the savings can be a challenge: With so many competing demands on their money - whether it is spending on themselves, helping out their families, or saving for future needs like college and even retirement - how are teens, so green about budgeting, supposed to wrap their heads around it all?
As the economy recovers, it is a dilemma that more young Americans will face. Employers hired almost a million workers age 16-19 in May and June, according to Labor Department data. That is roughly on par with last year's numbers, which was the best summer for teen employment since the Great Recession hit.
For those who do get to cash summer paychecks, job one - as Grace Bolt has demonstrated - is not to spend it all.
"Teens should come up with a percentage that gives them a meaningful investment while still permitting them to enjoy the fruits of their labor," says Selena Maranjian, co-author of The Motley Fool Investment Guide for Teens.
Start with basic savings or checking accounts (state laws vary regarding minors, and may require a parent to add his or her name to the account). To find a good starter account, compare rates and rules at Bankrate.com. Consider also scouting out local credit unions, which often charge lower fees and pay more in interest.
After your kids earn their own cash for a year or two, and learn basic money-management skills - perhaps with the help of a smartphone budgeting application, like that offered by Mint.com - they will be better equipped to take that next step of investing, says Joline Godfrey, author of "Raising Financially Fit Kids" and chief executive officer of Santa Barbara-based financial education consultancy Independent Means.
Consider a broad market index or balanced mutual fund such as those from Vanguard Group, suggests Godfrey.
Vanguard's Total Stock Market Index fund, for instance, is rated four stars by Chicago-based research firm Morningstar, boasts a low .17 percent in annual expenses, and will let your child own a slice of every public company in America. "It's a good way to get their feet wet, and not take any wild risks," she says.
IT'S NEVER TOO EARLY FOR A RETIREMENT ACCOUNT
An individual retirement account (IRA) can make a lot of sense for a young saver. The long-term implications of compound earnings, if one opens such an account at 15 instead of, say, 35, are powerful indeed: Money that earns even 5 percent a year will grow tenfold in 50 years.
These accounts are off-limits when it comes to calculating financial aid for college, says Motley Fool's Maranjian. "The Roth IRA is particularly compelling for young people, because it lets your withdrawals in retirement be tax-free."
There are other advantages to a Roth account for teens, too. If the money is withdrawn for the purpose of buying a first home, that is allowed tax- and penalty-free. Similarly if the cash is earmarked for higher education, there are no early-withdrawal penalties (although earnings on the principal are taxable).
DON'T FORGET COLLEGE
In addition, consider having your child devote some summer-job money for college savings. Even if the amounts involved are relatively miniscule, it will benefit them to have a little skin in the game. The average annual sticker cost of a four-year private college for tuition, fees, room and board is now a crushing $39,520, according to The College Board.
As for Grace Bolt, she plans to graduate from savings accounts to investing next year.
She already has big plans for herself: "I want my life to mean something. I want my money to work for me. And I want to be able to retire at 40."
(The writer is a Reuters contributor. The opinions expressed are his own.)
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