Managing your money properly to build wealth isn’t necessarily hard — it’s simply never taught to most of us.
It all boils down to grasping a few essential concepts, most of which can be understood — and executed — by a teenager.
Alexa von Tobel, founder and CEO of LearnVest.com, preaches one such essential concept: Build a nest egg as early as possible.
“Start saving for retirement!” she told Business Insider of the money advice she wish she could give her younger self.
“It’s never too early to put money away towards an IRA. Teens can even contribute money earned from baby-sitting or other jobs, and doing so can go a long way towards building up a sizable nest egg.”
Time is by far your biggest asset when it comes to investing in retirement accounts — such as a 401(k), Roth IRA, or traditional IRA — thanks to compound interest. The earlier you start saving, the better off you’ll be in the long run.
For teenage or millennial earners, there’s a great advantage to opening a Roth IRA, in addition to contributing towards your employer’s 401(k) plan if available.
Contributions to a Roth are taxed when they’re made, so you can withdraw the contributions and earnings tax-free once you reach age 59 1/2. Traditional IRA contributions, on the other hand, are tax-deductible when they’re made, meaning you’re taxed on every penny (contributions and earnings) when you withdraw funds.
There’s an income cap on the Roth — only married people earning less than $181,000, or single people earning less than $114,000, are eligible in 2015 — but it’s high enough that most young people can participate. There’s also a maximum yearly contribution: $5,500, for both the Roth and traditional IRA (or $6,500 for people age 50 or older).
Another advantage for the young employees: If teens are working a part-time job, their parents can contribute up to whatever their kid makes in income (up to the maximum yearly contribution of $5,500), and the money will grow tax-deferred. For example, if your kid earns $2,500 working a summer job, you could contribute $2,500 to their Roth IRA, certified financial planner Michael Solari told Business Insider.
Whether you’re a teen embarking on your first job or a well established employee, the golden rule always applies: Pay yourself first, and do it from the youngest age possible.