The Million Dollar Babysitter
As most of you know, our family welcomed our second daughter, Audrey, into the world in April. It is a unique time to have a newborn. Not only did we have a newborn at the estimated peak of the pandemic, but like so many families, we had to abruptly change our daily routine for our 4-year-old, and I had to begin working from home. We were extremely fortunate that my seventeen-year-old cousin, McKinley, was able to help us as a babysitter during the toughest months. When summer camps, playgrounds, swimming pools, and gymnastics were closed, McKinley was available to keep Elin entertained. This allowed my wife, Linnea, and I to take on the demands of nursing our newborn around the clock, taking a shower each day, and eating lunch.
Sadly, McKinley is off to college in a few weeks, and we found ourselves looking for an extra set of hands. Many families are fortunate to have a family member nearby to help, but since we did not have one, we began our search. What we found was that thousands of families are also currently looking for nannies, babysitters, and tutors as we approach the uncertainty of the upcoming school year. It appears that babysitters are flying off the shelf! On several occasions, I had an interview lined up with a prospect, but by the time we were able to talk on the phone, the applicant would inform me they had taken another job. Thankfully, after several weeks of searching, our family was able to find someone by referral in our neighborhood.
Once the stress of this situation settled, it had me thinking about the high school and college age babysitters that will be earning an income and what parents can do to help them grow their money through investing. One of the best ways to do this is by using a Roth IRA account to provide tax-free growth. Let’s look at a couple of examples to illustrate this concept:
Example #1:
Julie is 14 years old and decides to take on a babysitter job during the summer months. She works for one family for all four years of high school, making $3,000 per summer.
Although Julie is very responsible, she chooses to use her babysitting money for all her interests (clothes, friends, hobbies, etc.) Julie’s parents recognize the importance of saving money, and they have decided to open a Roth IRA for her. Her parents choose to contribute the maximum allowed on her behalf each year as a gift. In 2020, the maximum contribution for a Roth IRA is $6,000 per year or Julie’s earned income, whichever is less. In this case, her parents are constrained by Julie’s earned income, so they contribute $3,000 per year. That brings their total gift to $12,000 over four years.
Let’s examine how the $12,000 contribution grows, assuming that no further contributions are made after the four years of high school.
What an incredible gift! A $466,032 retirement account as a graduation present.
Example #2:
Jeff is 14 years old and works as a camp counselor during the summer. In addition, he also works retail during the school year. Jeff makes $8,000 per year all four years of high school. With the money that Jeff earns, he is able to make the maximum contribution of $6,000 into his Roth IRA all four years. That brings his total contribution to $24,000 over four years.
Let’s take a look at how the $24,000 contribution grows assuming that no further contributions are made after the 4 years of high school.
The $24,000 that Jeff contributed into his Roth IRA turns into almost 1 million dollars by the time he retires.
Many clients tell me that they wish they had started saving earlier in life and these illustrations show the power of investing and compounding interest. I wish I had been taught this information when I was working my paper route at twelve years old and when I spent every weekend of my junior year of high school working at the Lemstone bookstore in Randhurst Mall. My hope is that the high school and college students in your life will benefit from this information and will be motivated to contribute their earnings into a Roth IRA. Additionally, if you see my four-year-old mowing the neighbor’s lawn, you know why!!
This commentary reflects the personal opinions, viewpoints, and analyses of The Dala Group, LLC employees providing such comments. It should not be regarded as a description of advisory services provided by The Dala Group, LLC or performance returns of any The Dala Group, LLC client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The Dala Group, LLC manages its clients’ accounts using various investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.