Teaching Financial Literacy: How We Set Our Kids Up for Success

When our children started working, my spouse and I made them a deal. We wanted to give them a head start on their financial future, so we opened Roth Individual Retirement Accounts (Roth IRAs) for each of them. As parents, we understood the importance of teaching them how to manage money wisely. When I was a teenager, the thought of saving for retirement seemed irrelevant, and I probably would have laughed at the idea of opening an investment account. Instead, I spent my paycheck on things like trendy clothes and gadgets. Looking back, I regret not starting to save earlier, even if it was just in a basic savings account. We didn’t want our kids to make the same mistake, so we created a plan to help them build a strong financial foundation.

The Deal We Made with Our Kids

When our children got their first jobs around the ages of 15 or 16, we struck a deal with them. We agreed to cover the logistical costs associated with working, such as transportation, work clothes, and the occasional treat, like a Slurpee on a hot day. In return, they agreed to contribute 25% of their earned income each year to a Roth IRA. To incentivize them, we offered to match their contributions 3-to-1. This meant that for every dollar they put into their IRA, we contributed three dollars. Essentially, 100% of their earnings went into their IRA, up to the annual contribution limit.

At first, their earnings were well below the contribution limit, so our contributions made up the difference. As they earned more over time, their 25% contribution represented a larger portion of the limit, and our share gradually decreased. For example, in a year with a $6,000 limit, if their 25% contribution was $2,500, we only needed to add $3,500 to reach the limit. This arrangement served two main purposes: it helped them develop a consistent savings habit, and it gave their money time to grow through the power of compounding.

Why We Chose Roth IRAs

We chose Roth IRAs for our children because they offer unique benefits that other savings options don’t. First and foremost, Roth IRAs provide significant tax advantages. Since most teenagers don’t earn enough to owe income taxes, their contributions are made with after-tax dollars, and the money grows tax-free over time. This makes Roth IRAs an ideal way to build long-term wealth.

Another advantage of Roth IRAs is their flexibility. Many parents assume that their child needs a "real" job to qualify, but that’s not the case. Any earned income, whether from babysitting, mowing lawns, tutoring, or a part-time job, can be used to contribute to a Roth IRA. Additionally, the money in a Roth IRA can be withdrawn at any time without penalty for contributions (though not for earnings) if needed for emergencies, buying a first home, or other major expenses. This flexibility makes it more than just a retirement account—it’s a financial safety net for life.

How We Made It Work

Opening a Roth IRA for a teenager is simpler than many people think. Many brokerage firms offer custodial Roth IRAs, which allow parents to manage the account until the child turns 18 or 21, depending on the state. Once the account is open, the money can be invested in something straightforward, like an S&P 500 Index fund, where it can grow steadily over time.

We also made sure our kids understood the importance of tracking their income and reporting it accurately for tax purposes. This not only taught them responsibility but also ensured they were taking full advantage of the Roth IRA’s benefits. By starting early, they gained a significant head start on building wealth, thanks to the power of compounding. Even small, consistent contributions can add up significantly over decades.

The Bigger Picture: Financial Independence and Freedom

As parents, we worry about our kids’ futures—whether they’ll go to college, find meaningful careers, or build strong relationships. But one of the most valuable gifts we can give them is a foundation for financial independence. By teaching them to save and invest early, we’re helping them develop habits that will serve them well into adulthood.

A Roth IRA is more than just a retirement account; it’s a tool for creating opportunities. The money in it can provide peace of mind during emergencies, help them afford big milestones like buying a home or starting a business, or even give them the freedom to take a break from work to care for family. By starting early, our kids are gaining the freedom and security to make better financial decisions in the future.

A Gift That Keeps Giving

Helping your teen open a Roth IRA is one of the simplest and most impactful steps you can take to set them up for long-term success. It’s not just about saving for retirement; it’s about teaching them the value of money, the importance of delayed gratification, and the power of planning for the future. The process is straightforward, and the benefits are undeniable. By taking this small step today, you’re giving your child the tools they need to build a brighter financial future—a gift that will keep giving for decades to come.