The story I told my 18-year-old son to convince him to start saving for retirement this year

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  • My son turned 18 recently, and I helped him sign up for his first credit card and a Roth IRA.
  • He has a part-time job at a local fast-food restaurant and is saving 50% of his income.
  • To explain why it was smart to open a Roth IRA now, I told him a story about a "million-dollar deck" to show the value of compound interest.
  • Use Blooom to analyze your 401(k) today and see how you can grow your retirement savings »

I have six children and, as they are getting older, I am transitioning more from helping with their physical needs to helping with their emotional needs instead. Gone are the days of midday naps and diaper changes. Now, it's helping navigate emotional drama, and teaching them about personal finance and other things to help them be productive citizens and live on their own. 

My son's situation

My son recently turned 18 and, in addition to helping him sign up for his first credit card, we've been working with him on a budget. We homeschool most of our kids, so we have incorporated a personal finance curriculum into our regular lessons. So perhaps he has a bit more knowledge than the average 18 year old about budgeting, living below your means, and general personal finance. Still, like most things in life, there's nothing like actually applying it to your own situation to make the lessons you learned come alive.

My son has worked a few part-time jobs as a teenager. He worked several summers at a local Boy Scout camp, and more recently he started a part-time job working at a local fast-food restaurant. He works about 10-15 hours a week at close to minimum wage.

How his budget is set up

Once he started getting regular paychecks from his fast-food job, we sat down to come up with a basic budget. There are as many ways to set up a budget as there are people in the world. In the end, the actual framework itself doesn't matter as much as coming up with any framework, and then doing your best to stick with it.

One popular budgeting framework is the 50/30/20 budget, where you take 50% of your income for your needs, 30% for your wants, and 20% for long-term savings. We started with that but decided that, for him, it didn't really make sense. Since he still lives with us, he doesn't have very many actual needs. Instead, his budget has him tithe 10% to our church, save 50% in a savings account, and use the remaining 40% for discretionary spending.

His paycheck is deposited into my checking account every two weeks. When that happens, we sit down at the dining room table and process his paycheck with an envelope of cash and a jar of coins. First, I give him the gross amount of his paycheck. Then, one by one, he pays me the amount withheld for taxes, his tithing, and his savings. 

The reason we do it this way instead of me just giving him 40% of his paycheck in cash is because I feel like the act of passing over the dollar bills physically helps to give him a better idea of where his money is going.

The basics of setting up a Roth IRA

A Roth IRA is one way to save for retirement. Where a Roth IRA differs from a traditional IRA is that with a Roth IRA, you contribute after-tax money but then your money grows tax-free, so when you withdraw your money down the road, it's not taxed. 

Whether a Roth IRA, a traditional IRA, or other retirement savings vehicle is right for you is out of the scope of this article, but a good rule of thumb is if you're in a low tax bracket now, then a Roth IRA can be a good option.

Since my son is in essentially a 0% tax bracket currently, we decided that a Roth IRA made a lot of sense for him. There is not a minimum age for starting a Roth IRA, but you are required to have earned income. You can only contribute to a Roth IRA up to the amount of earned income that you have in a given year. So we started up a Roth IRA for him, and he makes his regular contributions with each paycheck.

The 'million-dollar deck'

One thing that we have tried to teach him and all of our children is the importance of compound interest. We regularly talk about both the bad parts of compound interest (in the context of paying your credit cards off in full each month) and the good parts of compound interest (in the context of starting your retirement savings early). 

One story that I heard many years ago that illustrates this point was told by an engineer who was one of the early employees of Cisco Systems. Cisco makes routers, switches, and other parts essential for the internet and networking. It was one of the big darlings of the 2000s dot-com stock runup, and the stock and options of early employees really took off similar to those of early employees of Apple, Uber, or Amazon today.

This engineer had enjoyed what he felt was a pretty significant runup on his employee stock options, and wanted to use some of that equity to build a nice outdoor deck/patio on his house. He sold off about $25,000 in stock options to build his outdoor living space. Fast forward five to 10 years as he is telling this story, and Cisco stock has appreciated so much he now refers to this as his "million-dollar deck," referring to what he could have earned if he'd allowed his stocks to continue growing.

While we never know what the future of the stock market or any individual stocks might hold, the story just goes to show the importance of investing early and leaving your investments alone.

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