Help Your Teen Stash Some Summer Cash

Physician's Money Digest, August15 2004, Volume 11, Issue 15

With summer upon us, manyteens have joined the ranksof the employed. In 2003,60.9% of individuals aged 16 to 24 gotsummer jobs, according to the USDepartment of Labor Statistics. Whileyour child may be ready to sink thosenewfound funds into a hip wardrobe ornew car, you have a unique opportunityas a parent to teach your teenager somelessons on financial responsibility.

Have Some Fun

While you would ideally like yourteen to save every penny they earn sothey can potentially experience a comfortablefuture on their own dollar, youalso know how important it is for themto enjoy the fruits of their own labor.Working hard all summer and not spendingany of the money they earn canquickly erode a teenager's sense of purposewhen it comes to a summer job.

You can, however, help your teenspend their funds constructively byestablishing a budget together. Determinea dollar amount they can spend onentertainment, clothing, and food eachmonth. This is a good way to show themthey can still enjoy their cash even if theysave a portion of it. It also createshealthy habits for when they do moveinto the dorm and you can't superviseevery dollar they spend.

Set Aside for College

Saving for college is probably themost obvious choice for your teen'ssummer funds. Teens can contribute toa 529 plan or Coverdell EducationSavings Account (ESA) that a parent orguardian has established in their name.Keep in mind that for the CoverdellESA, a $2000 annual contribution limitper beneficiary applies.

Another option is to establish a custodialsavings account. You will have controlover the account until your childreaches the age of termination, but theycan still deposit funds into it. Besidesteaching good saving habits, your childcould use this account to save for educationalneeds, such as a computer or dormroom supplies. As long as your childspends the money in the account beforeapplying for financial aid, the fundswon't be counted against them asmoney that could be used to pay forschool expenses. College savings planscan also be a benefit to you. Many plansallow you to deposit funds for the bene-fit of your child that accumulate tax-deferred.You also get the benefit of tax-freedistributions if the funds are usedfor qualified expenses.

Save for Retirement

It is tough to think of retiring whenyou are age 30, much less when you areage 16, but money from a summer jobcan be a good seed from which to growa retirement fund. Besides setting a solidexample for future paychecks, settingaside even $25 a week for retirement cantruly benefit your child in the long run.

For example, if your 16-year-oldinvests $25 a week from their paycheckand they continue to do so until retirementat age 65, they will have savedover $745,000, assuming an annualreturn of 8%. That might be a compellingargument to get your teen toforgo two trips to the fast food restaurantin exchange for the possibility of amore comfortable retirement.

Joseph F. Lagowski is vice president,investments, and a financialconsultant with AG Edwards inHillsborough, NJ. He welcomesquestions or comments at 800-288-0901 or www.agedwards.com/fc/joseph.lagowski. This article was providedby AG Edwards & Sons, Inc, member SIPC.