Ask the grumpies: Where should a teenager put extra money?

Miser mom asks:

One of my sons is going to come into a temporary cache of a lot of (for him) money: he’ll be getting something like $700-$800 each month for about a year. Where should he put this money?

He is 18 and lives at home — and will continue to be living at home, in high school, until he’s 20 (by which point, the money will have stopped coming in. We’d like him to set the money aside so that he can use it when he starts out on his own, by which we mean post-secondary education (most likely, a school of technology, where he’ll learn something like welding — not a 4-year college).

He has a savings account at our credit union, but that earns like zero-point-zero-zero-something interest, PLUS it’s accessible via his ATM card, which is a remote temptation for him. CDs? E-banking? Roth IRA?

I should mention that he has 529 plans and UGMA accounts that will *more* than pay for his education, so the money will eventually just be spending money. Or possibly the seeds of his retirement account.

Unfortunately, when you need money in the short term there aren’t a lot of good options.  So if the plan for this money is to put down a rental deposit for an apartment, then his best option is a CD or term share (the credit union version of a CD).  The rates on these won’t be great but it will lock up the money so it is difficult to get to until the date it is needed.  And generally the rates are a little bit better than most savings accounts.  You may want to shop around to see what’s out there.

He can only save for retirement in an IRA (Roth or otherwise) if he has earned income.  (Social Security and Disability do not count as earned income.)  Retirement is a great place for this money to go since jobs requiring physical labor often also require earlier retirement ages as they wear the body down, though who knows what life will be like in 30 or 40 years.  If he has earned income, whether to choose the short-term savings or the IRA (invested in a Vanguard Target Date fund or a low fee Total Stock Market Index) depends on whether or not you plan to help him with his housing when he starts post-secondary education because renting an apartment can require some combination of last month + deposit + realtor’s fee in addition to the first month’s rent, which can be pretty hefty for someone just starting out.

If you’re definitely planning on having him use it at age 20 even if it gets used for housing, then choose the CD/termshare option.  Short term savings needs to be in safe, non-risky savings vehicles.  You can take on more risk with long-term savings.

If he doesn’t currently have earned income and you do plan on helping him out with initial housing expenses, another possibility is to lock this money in a CD or savings account until he starts earning income of his own and then putting this money into a Roth IRA (again in a Vanguard Target Date Fund) while living off of his earnings.  His future self will really appreciate that he’s done so at age 62 or whenever in the future he is wondering if he can ease off of full-time work.

As always, we may be wrong, we’re not experts, consult with actual experts and/or do your own research before making any important monetary decisions.

What do you think, Grumpy Nation?


9 Responses to “Ask the grumpies: Where should a teenager put extra money?”

  1. monsterzero Says:

    I was going to say Roth IRA but had forgotten about the earned income requirement.

    Having a Capital One 360 online account has been useful for me because of the two business days it takes to get money back out of it. It’s a good place to stash money until he can get an IRA or whatever.

  2. Leah Says:

    If he has any earned income, at least start out a Roth IRA. My parents got me a bank account with my first job and were good about having me save money, but I really wish I’d started up a retirement account too. My parents just didn’t know about them (they do retirement through their workplaces). I think there’s lower cost ways to start with Vanguard or Fidelity than the standard $3k lump sum if the person is young enough.

    I also like having an online savings account. I have Capitol One 360, but there might be some with higher interest rates (I haven’t bothered to shop around on this one due to inertia). Needing to transfer the money and wait has been a great boon in keeping me from spending it, tho I am naturally a saver anyway.

    Agreed with the post that the main thing is to think about the goal for this money. Is this to be used for living expenses during school? Then you’ll want something like a CD that is harder to access but can be reached by the right age. But if there’s no concrete plan, starting a retirement account would be so fabulous.

  3. chacha1 Says:

    If this teenager is genuinely interested in a skilled-craft career, vs a regular college-track thing (and I’m in favor btw, wish I had done it that way) then he is likely going to run into job expenses he may not have thought of. During vocational school, the school provides all the tools. And if he gets a job in a factory, the factory will probably have all the tools. But once he has finished his course of study, he will need – if he goes to work for a building company – his own work vehicle, a full set of tools, and probably a state certification and/or contractor’s license.

    He is also very likely going to have moving expenses, because you have to go where the jobs are. So with an amount of money this small, my advice would be save it, and designate it, for start-up costs rather than for retirement. He’ll be able to save for retirement a lot faster if he’s not paying off a huge loan for his F150.

  4. Revanche @ A Gai Shan Life Says:

    I was an unsophisticated teen and kept my cash earned around that age in my piggybank or my savings account but I know a friend whose parents pointed her at a couple of stocks and she invested to great benefit. The Apple stock she bought and sold much later on funded quite a few of her post-high school activities. I wouldn’t normally suggest investing in individual stocks but it isn’t a horrible way to place some of that money if you’re not day trading.

  5. bethh Says:

    What’s the parental financial situation? If you have the money, perhaps you could have him put the money in a CD with a bad rate, but also promise to match him something like 5% if he lets it sit until it matures fully. If that would motivate him to save it, and if it would get him to start thinking about fiscal responsibility, that might be a worthy investment.

  6. Debbie M Says:

    I also had a Capitol One 360 account, but I prefer Alliant Credit Union. I started at the latter because they had an HSA, but now they have higher interest that CapOne360. And they’re a credit union.

    I once had a roommate who would buy US Savings Bonds because they were a pain to cash and they were so pretty that fanning them out in her hand made her feel rich and reticent to sell them.

    I love ChaCha’s idea of saving it until graduation to get tools. By then, he’d know which ones he likes and won’t have to learn the hard way about the terrible cheap ones.

  7. Bullfrog Says:

    A high interest savings account might be the way to go: A lot of them have requirements like a regular deposit or x transactions a month. Looking over what’s out there for 3 – 5% interest accounts and seeing if any of the requirements would be do-able might make sense. Otherwise there are the straightforward high yield accounts at around 1% APY that have less requirements.

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