Andrea Coombs at Marketwatch doles out the advice for teenagers in a new article, answering the question of where teens should keep the money they earn.
Not surprisingly, the advice is eerily similar to the advice an older person might receive: Create an emergency fund in a high-yield savings account first, then fund a Roth IRA, and with anything left over, let them experiment in the stock market within reason.
But there is the issue of college. Any funds saved by a potential college student count against her when it comes to qualifying for federal financial aid. That penalty is shrinking in 2007, but some people might consider keeping the teen’s money in an account owned by a parent until the kid is out of college. Other advisors say the benefit of letting the teen manage his own money, keeping them involved and vested, outweighs the slight financial aid disadvantage.
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{ 2 comments… read them below or add one }
Q: Where Should Teens Stash Their Cash?
A: First $500 should go into a Kids savings account paying 10%
Details:
http://bankdeals.blogspot.com/2005/12/10-savings-account-for-kids.html
You can’t beat 10% FDIC guaranteed return with anything else :P
Q: Money in kids name negatively affects his financial aid?
A: True. So, “get rid” of the money in his name right before the child goes to college. If the sum is not too large (and it shouldn’t… common he’s only a kid :P) you can just do a gift from the child to the parent in 1-2 years before applying for financial aid. Prepay things before applying for FAFSA. Money in a retirement account (ex: Roth) does not count against financial aid. Original contributions won’t count, the gains in Roth would count as income. No need to pull those gains out if you can get a subsidized loan (defered until graduation).
Regarding the Roth, the kid can’t contribute more than his active income (wages, etc). So as an incentive to work harder, you could say to the kid: “I’ll match whatever you make by putting it into your Roth account.” If the kid misbehaves, no more contributions
Emergency fund? No way, Roth first then emergency fund. Your parents are your emergency fund…