One Smart Money Move to Make While You’re Still in High School: Start a Roth IRA
I think high school students should consider starting a Roth IRA. I’ll take you through why it is such a valuable tool and how to get started.
But first, I should mention that this recommendation should not put you into debt. If it does, it isn’t worth it. Start a Roth IRA later on when you’ve eliminated your debt and funded an emergency fund with three months of your expenses.
**I am not a financial advisor and this is not legal advice**
What is an IRA?
I.R.A. stands for Individual Retirement Account.
You may be thinking, “Kyle, why should I start a retirement account while I’m still in high school?”
I’ll show you the magic of compound interest in just a moment. The basic idea is that the earlier you set up an investment account, the sooner you give yourself a chance to let your money work for you. You want your money to grow on itself.
What Does Roth Mean?
Don’t get hung up on this. There are two types of standard IRAs – a Roth and a Traditional. I recommend you use a Roth because you won’t pay any taxes on your money when you decide to take it out later in life (sounds good, right? It is).
Why Is It a Good Idea to Start a Roth IRA Early in Your Life?
I mentioned the magic of compound interest a moment ago.
And before you even ask, the answer is, “Yes, it is VERY real.”
The reason compound interest is so magical is this: the longer you keep your money invested, the more your interest will grow on itself.
I’ll make it easy to understand, then I’ll give you some exciting numbers.
Let’s say you put $100 into some kind of investment, and you expect that investment to grow by 10% every year. At the end of the first year, you’ll have $110.
You’ve earned 10% more (or $10) on your $100 because it was invested. Make sense so far?
Then the magic starts to happen. In year two, you’re not just earning interest on your initial $100, you now have $110. You’re earning interest on the entire $110 you now have in the investment. If your $110 grows at a 10% rate, your money will grow by $11 in year two – so you’ll now have $121. This will continue to happen over time. Your money is compounding.
Your money is growing on itself.
Let’s see how this works in your favor over time.
- Year 1: $110
- Year 2: $121
- Year 3: $133.10
- Year 4: $146.41
- Year 5: $161.05
- Year 6: $177.15
- Year 7: $194.86
- Year 8: $214.34
- Year 9: $235.77
- Year 10: $259.34
Money grows on itself when it is invested even when no extra money is added to it!
When Does Compound Interest Become Magic?
The above numbers may not get you very excited, but let’s take a look at some numbers that might.
If you start a Roth IRA with $100 at the age of 15, and commit to investing $100 per month in it moving forward, you will have over $1,000,000 by the age of 56. Yes, with just $100 per month, you would become a millionaire 9 years before the typical retirement age of 65.
I realize not many high school students can invest $100 per month, so let’s start a little later. Let’s say you start a Roth IRA and hustle to get $1,000 in it by the time you’re done with college at age 22. You then get a job and invest $300 per month into your Roth IRA from your paycheck each month. You will have over $1,000,000 by the age of 57! You’ll have more than a million dollars before you even turn 60 because you started investing $300 per month early on in your life.
I realize not everyone has goals to become a millionaire, but the numbers above are very real. Starting early and being consistent in your investments over time can lead to some pretty exciting numbers later on.
If you’d like an easy way to play around with some compound interest numbers on your own, I’ve found this compound interest calculator to be helpful.
When Can You Start a Roth IRA?
If you are 18 in most states, you’ll be able to start a Roth IRA on your own.
If you’re under 18, you’ll need an adult to set up what is called a “custodial account” for you.
Not all banks or investment platforms offer the ability to create a custodial account, but both Fidelity and Charles Schwab offer the ability to set one up. Both of these financial institutions don’t require a minimum to start your account so you can set it up with as little money as you’d like.
What Funds Should You Keep Your Money In?
A Roth IRA is simply an account. You’ll still have to decide how the money in this account is invested. If you’re confused about what you should invest in when setting up your Roth IRA, I’d recommend just picking the S&P 500 index fund for now to make it very easy on yourself (but I’m not a Financial Advisor – so legally, I’m not giving you advice). By choosing the S&P 500 index fund, you’ll automatically be investing in the top 500 companies in the United States.
Get Money Into Your IRA
Once you have this account set up and you’ve determined where you’d like your money to be invested, you’ll want to hustle a bit to get money in there.
There are lots of ways to start filling your Roth IRA. Ask your parents if they’d contribute a small amount towards your Roth IRA every month for the chores you do. Send a message to your relatives saying you’re starting to learn about money, and see if they’d each send you $10 to get started with your first ever investments. Set aside some money from your part-time job to put into your Roth IRA every month. See if your friends will Venmo you $5 for your Birthday that you can use to invest for your future.
Little bits here and there will add up – especially if you’re starting while you’re in high school because you may have 40-50 years before you’ll retire (or sooner with tips like these). In those 40-50 years, your money will continue to grow on itself because it is invested instead of sitting in your dresser drawer.
One Last Requirement
Legally, you are required to have some kind of income if you’re starting a Roth IRA as a minor. You are only allowed to contribute as much as you earn in a year. So if you make $2,000 at your part-time job, but your rich uncle wants to put $6,000 into your Roth IRA for you – sorry, that’s not going to fly with the IRS. Keep this in mind as you get started.
Get Started with a Roth IRA While In High School
By starting a Roth IRA while you’re in high school, you give your money a chance to grow on itself year after year after year. And if you continue to follow my guidelines, tips, and tricks, you’ll be amazed by how much you’ll save for your future self by taking small steps like this one early on in your life.
