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New Cash App accounts prioritize spending over investing and miss the opportunity to teach youth wealth-building habits, while accounts like the Fidelity Youth Account emphasize investing from an early age to build long-term wealth through compound growth.
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A teenager who invests just $9,000 of summer job earnings in a Roth IRA between the ages of 15-17 could accumulate over $400,000 in tax-free retirement income by age 65 thanks to 50 years of compound growth at 8% annual returns.
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A mom named Sandy from Michigan called into the Clark Howard Podcast this week with a parenting question. “My 12-year-old asked me about getting a Cash App youth account to learn more about finances,” she said. “I think his favorite part is that he gets to design his bank card. First things first, right?”
Host Clark Howard told Sandy why a Cash App account isn’t the best option. “This program is a program to spend money,” he explained. “They have little in there about how to have a savings account as a young person, but it’s really about how to spend. My problem with any banking program aimed at young people is about making them spenders and borrowers. Not investors.”
Accounts for teenagers should teach them what money is for. Choose a tool that celebrates tap to pay, and the lesson is that money is for spending. Choose a tool that allows a young person to buy their first share of an index fund, and the lesson is that money is for growth.
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Howard suggested that Sandy look into a product like the Fidelity Youth Account instead. He said the account is “great because its emphasis is on allowing access to funds as your 12-year-old wants, but it’s also about teaching investing. … [It creates] an idea early on about the purpose of building wealth for the future, regardless of why they are building that wealth.”
He emphasized the long-term benefits of starting to invest early. “As soon as a young person gets a job, building a habit in their first job at 14, 15, or 16, that they put money into a Roth IRA, getting about 50 years of growth on that money. Time creates so much wealth, and building habits creates so much wealth.”
Roth IRA contributions are made with after-tax dollars, every dollar of growth includes tax-free income, and qualified withdrawals in retirement are tax-free. A teenager in the 10% or 12% bracket is effectively buying tax-free retirement income at a discount no older person will ever see.
Consider this scenario: A 15-year-old child carries bags in the summer for three years. You contribute $3,000 each year to a Roth IRA held within a broker-dealer account, which is invested in an overall market index fund. He never added another dollar after 17 years. Using typical compound growth at 8% over 50 years, each dollar becomes about $46. His $9,000 in grocery money adds up to more than $400,000 in tax-free retirement income.
Besides investing, Sandy wants her teenager to learn about budgeting and spending money. Howard suggested a credit union account to give the teenager a safe way to pay for gas and pizza. Credit unions “don’t pay nearly all the time” and avoid the heavy-handed sales that Cash App and many of the big banks’ youth products are banking on, Howard said.
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If your child has earned income, open a Fidelity Roth IRA for Children and make regular contributions. Consider buying one low-cost market index fund. Let the young person watch the position grow and use the market fluctuations as a teaching moment.
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If your child doesn’t have access to cash yet, consider opening a checking account at a credit union for everyday cash.
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Sit down with a teenager and show them the compound growth table for a $3,000 investment held for 50 years at 7%, 8%, and 9%.
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