Personal Finance

How to incentivize your kid to start investing for retirement

Published

6 months ago

October 13, 2024

Momo Productions | Stone | Getty Images

Once you’ve decided that opening a Roth individual retirement account for your child is a great idea, now comes the hard part: convincing the child to save for a far-off retirement instead of spending that hard-earned money.

I have some ideas for making the case to your child.

While you’re doing so, it’s also important to consider what counts as “earned income” for a child’s Roth IRA.

How to get your child to start saving for retirement

Getting your kids to save can set them up for long-term financial success. Here are some ways to do it:

Initiate a “parental match” program in which you chip in some additional money, say another $5 for every $10 of earnings they put into the Roth IRA. Offer tangible rewards for every savings goal they meet; charts and apps can help them keep track. Set up a “savings challenge” in which everyone tries to save a specific amount each month; the one who saves the most or meets their goal gets a reward.

More from CNBC’s Advisor Council

Encourage them to round up all purchases to the nearest dollar and save the difference. For example, if something costs $4.50, they save the remaining 50 cents. Offer to pay your child interest on the money they save. You could set a small percentage, like 5%, to be added to their savings monthly or quarterly. This teaches them about earning money on savings through compound interest.

Motivate your child to take on extra chores or small jobs like babysitting, helping out in the neighborhood, or tutoring. Then, encourage them to save a portion of their earnings by offering a bonus if they save a certain percentage. If they start a small business, such as selling crafts on Facebook Marketplace or Etsy, suggest they save a portion of their profits and offer to match those savings.

Celebrate major savings milestones, such as saving the first $100, with a small reward, whether it’s a favorite treat, a day out or a new book or game. Recognize their savings achievements in front of family or friends to reinforce positive behavior.

Making the case for saving and investing

Use this opportunity to explain how compound interest works, showing them how even small amounts can grow over time. If your child wants to spend money on a particular item, require them to save an equal amount before you allow them to make the purchase.

For example, if they want to buy a $30 toy, they must first save $60, half for savings and half for the toy. This strategy encourages them to think about balancing saving with spending. Instead of monetary rewards, offer privileges for saving —such as extra screen time, a later bedtime, or a special outing.

This can make the idea of saving more appealing, especially for younger children. Offer more independence, such as managing a small part of the household budget, as a reward for consistent saving.

Teach financial literacy and lead by example. Let your kids help choose their Roth IRA investments. Seeing how their money can grow through smart investing can be a powerful incentive. Create a family investment club where everyone picks stocks or other investments. Offer a small prize to the person whose investment performs best over a set period.

Regularly discuss your own savings goals and achievements with your child. When they see you prioritizing savings, they’re more likely to do the same.

Work together on a family savings goal, such as a vacation, and let them see how their contributions help reach the goal faster.

Incentivizing your child to save is about making saving rewarding and fun. These strategies can help your child develop strong financial habits that will benefit them throughout their life.

Ways to earn money for Roth IRA contributions

To contribute to a Roth IRA for kids, the child must have earned income. This income could come from traditional employment, such as a part-time job, or from self-employment activities, such as babysitting or lawn mowing.

The maximum annual contribution for 2024 is $7,000 or the total of the child’s earned income for the year — whichever is less. If a generous parent or other benefactor is willing, they can allow the child to keep part or all of their earned income and fund the Roth, so long as their contribution doesn’t exceed what the child earned.

Roth IRA might be the best thing the U.S. government did for low-income families: Jim Cramer

What counts as earned income for a Roth IRA? Earned income is money received from work or services rendered, and it’s crucial to understand what qualifies to ensure your child’s contributions are compliant with IRS rules:

Wages and salaries:

Paid internships: Most college campuses today have internship offices onsite that can help you with your search for a paid internship. This provides an opportunity to earn income while developing skills and building networking relationships for your future career aspirations.
Part-time jobs: Earnings from a part-time job, such as working at a grocery store, fast food restaurant, or retail shop, count as earned income. For instance, if a 16-year-old works at a coffee shop and earns $4,000 over the summer, that $4,000 qualifies as earned income.
Formal employment: Income from formal employment, where the child receives a W-2 form, is the most straightforward type of qualifying income. This includes hourly wages, salaries, and tips.

Self-employment income:

Babysitting: Money earned from babysitting jobs is considered self-employment income. For example, if your teen earns $1,500 from babysitting throughout the year, this amount can be used for Roth IRA contributions. The same goes for lawn or yard work around the neighborhood.
Tutoring: My son has done quite a bit of this. Tutoring other students, whether in person or online, also qualifies.
Art and crafts sales: If your child sells homemade crafts or art at local fairs or online and earns income from these sales, it qualifies as earned income.
Gig economy jobs: Earnings from online platforms where a minor might provide services — such as graphic design, writing or coding — count as earned income.
Delivery jobs: Earnings from food delivery jobs, where allowed by age restrictions, through services such as DoorDash or Uber Eats also count as income.

What does not qualify as earned income: Money received from parents for chores or as an allowance does not count, nor do cash gifts or investment earnings, nor scholarships and grants. This last category is considered non-taxable income and therefore cannot be used for Roth IRA contributions.

— By Winnie Sun, co-founder and managing director of Irvine, California-based Sun Group Wealth Partners. She is also a member of the CNBC Financial Advisor Council.

Personal Finance

Here’s why ‘dead’ investors outperform the living

Published

22 hours ago

April 5, 2025

Business Finance News

Andrew Fox | The Image Bank | Getty Images

“Dead” investors often beat the living — at least, when it comes to investment returns.

A “dead” investor refers to an inactive trader who adopts a “buy and hold” investment strategy. This often leads to better returns than active trading, which generally incurs higher costs and taxes and stems from impulsive, emotional decision-making, experts said.

Doing nothing, it turns out, generally yields better results for the average investor than taking a more active role in one’s portfolio, according to investment experts.

The “biggest threat” to investor returns is human behavior, not government policy or company actions, said Brad Klontz, a certified financial planner and financial psychologist.

“It’s them selling [investments] when they’re in a panic state, and conversely, buying when they’re all excited,” said Klontz, the managing principal of YMW Advisors in Boulder, Colorado, and a member of CNBC’s Advisor Council.

“We are our own worst enemy, and it’s why dead investors outperform the living,” he said.

Why returns fall short

Dead investors continue to “own” their stocks through ups and downs.

Historically, stocks have always recovered after a downturn — and have gone on to reach new heights every single time, Klontz said.

Data shows how detrimental bad habits can be relative to the buy-and-hold investor.

The average stock investor’s return lagged the S&P 500 stock index by 5.5 percentage points in 2023, according to DALBAR, which conducts an annual investor behavior study. (The average investor earned about 21% while the S&P 500 returned 26%, DALBAR said.)

The theme plays out over longer time horizons, too.

The average U.S. mutual fund and exchange-traded fund investor earned 6.3% per year during the decade from 2014 to 2023, according to Morningstar. However, the average fund had a 7.3% total return over that period, it found.

That gap is “significant,” wrote Jeffrey Ptak, managing director for Morningstar Research Services.

It means investors lost out on about 15% of the returns their funds generated over 10 years, he wrote. That gap is consistent with returns from earlier periods, he said.

“If you buy high and sell low, your return will lag the buy-and-hold return,” Ptak wrote. “That’s why your return fell short.”

Wired to run with the herd

Emotional impulses to sell during downturns or buy into certain categories when they’re peaking (think meme stocks, crypto or gold) make sense when considering human evolution, experts said.

“We’re wired to actually run with the herd,” Klontz said. “Our approach to investing is actually psychologically the absolute wrong way to invest, but we’re wired to do it that way.”

Market moves can also trigger a fight-or-flight response, said Barry Ritholtz, the chairman and chief investment officer of Ritholtz Wealth Management.

“We evolved to survive and adapt on the savanna, and our intuition … wants us to make an immediate emotional response,” Ritholtz said. “That immediate response never has a good outcome in the financial markets.”

These behavioral mistakes can add up to major losses, experts say.

Consider a $10,000 investment in the S&P 500 from 2005 through 2024.

A buy-and-hold investor would have had almost $72,000 at the end of those 20 years, for a 10.4% average annual return, according to J.P. Morgan Asset Management. Meanwhile, missing the 10 best days in the market during that period would have more than halved the total, to $33,000, it found. So, by missing the best 20 days, an investor would have just $20,000.

Buy-and-hold doesn’t mean ‘do nothing’

Of course, investors shouldn’t actually do nothing.

Financial advisors often recommend basic steps like reviewing one’s asset allocation (ensuring it aligns with investment horizon and goals) and periodically rebalancing to maintain that mix of stocks and bonds.

There are funds that can automate these tasks for investors, like balanced funds and target-date funds.

These “all-in-one” funds are widely diversified and take care of “mundane” tasks like rebalancing, Ptak wrote. They require less transacting on investors’ part — and limiting transactions is a general key to success, he said.

“Less is more,” Ptak wrote.

(Experts do offer some caution: Be careful about holding such funds in non-retirement accounts for tax reasons.)

Routine also helps, according to Ptak. That means automating saving and investing to the extent possible, he wrote. Contributing to a 401(k) plan is a good example, he said, since workers make contributions each payroll period without thinking about it.

Personal Finance

As recession risk jumps, top financial pros share their best advice

Published

2 days ago

April 4, 2025

Business Finance News

Fg Trade | E+ | Getty Images

There is at least a 60% chance of recession if Trump's tariffs stick, says JPMorgan's David Kelly

Meanwhile, J.P. Morgan raised its odds for a U.S. and global recession to 60%, by year end, up from 40% previously.

“Disruptive U.S. policies has been recognized as the biggest risk to the global outlook all year,” J.P. Morgan strategists said in a research note on Thursday.

Allianz’s Chief Economic Advisor Mohamed El-Erian also warned on Friday that the risk of a U.S. recession “has become uncomfortably high.”

‘There is some nervous energy’

“There is some nervous energy there,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York, of the conversations he is having with his clients.

Even though stocks took a beating on Friday, “we advise them to focus on fundamentals and what they can control, which means maintaining a strong cash reserve and discipline around cash flow so that they can stay in the market and feel confident about taking advantage of buying opportunities,” said Boneparth, a member of the CNBC Financial Advisor Council.

Recession or not, maintaining a consistent cash flow and investment strategy is key, other experts say.

“The best way to manage these moments is to maximize your current and future selves is to block out noise that doesn’t apply to your plan,” said CFP Preston Cherry, founder and president of Concurrent Financial Planning in Green Bay, Wisconsin.

Letting emotions get in the way is one of “the greatest threats to life and money plans,” said Cherry, who is also a member of the CNBC Advisor Council.

When it comes to volatility tolerance, sharp drops in the market are to be expected, the advisors say.

“The stock market is unpredictable, but historically, there’s a trend in how the market recovers,” Cherry said.

“In years with market corrections and pullbacks, these are the worst days, which are followed by the best days,” he added.

In fact, the 10 best trading days by percentage gain for the S&P 500 over the past three decades all occurred during recessions, often in close proximity to the worst days, according to a Wells Fargo analysis published last year.

“Being out of the market and missing the best days and cycles after recessions significantly hurt portfolios in the long run,” Cherry said.

Boneparth said his clients also “know volatility and uncertainty is part of the game and, most importantly, know not to sell into chaos.”

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Personal Finance

Amid tariff sell-off, avoid ‘dangerous’ investment instincts, experts say

Published

2 days ago

April 4, 2025

Business Finance News

Jamie Grill | Getty Images

As U.S. markets continue to suffer steep declines in the wake of the Trump administration’s new tariff policies, you may be wondering what the next best move is when it comes to your retirement portfolio and other investments.

Behavioral finance experts warn now is the worst time to make any drastic moves.

“It is dangerous for you — unless you can read what is going to happen next in the political world, in the economic world — to make a decision,” said Meir Statman, a professor of finance at Santa Clara University.

“It is more likely to be driven by emotion and, in this case, emotion that is going to act against you rather than for you,” said Statman, who is author of the book, “A Wealth of Well-Being: A Holistic Approach to Behavioral Finance.”

That may sound easier said than done when headlines show stocks are sliding into bear market territory while J.P. Morgan is raising the chances of a recession this year to 60% from 40%.

“When the market drops, we have sort of a herd instinct,” said Bradley Klontz, a psychologist, certified financial planner and managing principal of YMW Advisors in Boulder, Colorado. Klontz is also a member of the CNBC FA Council.

That survival instinct to run towards safety and away from danger dates back to humans’ hunter gatherer days, Klontz said. Back then, following those cues was necessary for survival.

But when it comes to investing, those impulses can backfire, he said.

“It’s an internal panic, and we’re just sort of wired to sell at the absolute worst times,” Klontz said.

‘Never trust your instincts when it comes to investing’

When conditions are stressful, our frame of reference narrows to today, tomorrow and what’s going to happen, Klontz said.

It may be tempting to come up with a story for why taking action now makes sense, Klontz said.

“Never trust your instincts when it comes to investing,” said Klontz, particularly when you’re excited or scared.

Why investors should hold despite market sell-off

Meanwhile, many investors are likely in a fight or flight response mode now, said Danielle Labotka, behavioral scientist at Morningstar.

“The problem with that, in acting right away, is that we’re going to be relying on what we call fast thinking,” Labotka said.

Instead, investors would be wise to slow down, she said.

Just as grief requires moving through emotional stages in order to eventually feel good, it’s impossible to jump to a good investing decision, Labotka said.

Good investment decisions take time, she said.

What should be guiding your decisions now

Many investors have experienced market drops before, whether it be during the Covid pandemic, the financial crisis of 2008 or the dot-com bust.

Even though we’ve experienced volatility before, it feels different every time, Labotka said.

That can make it difficult to heed to the advice to stay the course, she said.

Investors would be wise to ask themselves whether their reasons for investing and the goals they’re trying to achieve have changed, experts say.

“Even though the markets have changed, why you’re invested, your values and your goals probably haven’t,” Labotka said. “These are the things that should be guiding your investments.”

While there is the notion that life well-being is based on financial well-being, it helps to take a broader view, Statman said.

At any moment, no one has everything perfect when it comes to their finances, family and health. In life, as in an investment portfolio, all stocks don’t necessarily go up, and it’s helpful to learn to live with the good and the bad, he said.

“Things are never perfect for anyone,” Statman said.