For the Kids: Make Your Summer Earnings Grow

Working teens, how does getting rich the easy way sound?

Ah, summer. It's the time to make a little money, watch a lot of reality TV, and hone your Rock Band skills on PS3. If you're smart, summer can also be your opportunity to lay the groundwork for future financial freedom.

You may not be interested in more advice about how to be responsible. That's understandable; it is summer after all, and you have better things to do. But here's the thing-once you finish your schooling, your freewheeling summers are history...until you retire. If you're lucky, you'll get a two-week vacation and then you're right back to the grind. So what sounds better: Planning now to get your summers back sooner, or working until you're too old to have any fun?

Harness the power

As a working teen, you have two things on your side. You're young and you have a job. Age is important because it gives you more time to harness the power of compounding, which is the easiest way to make money. All you have to do is leave your cash invested and wait. To demonstrate:

• You deposit $1,000 into an account earning 4 percent interest. Every year, you withdraw the $40 interest earned. After 20 years, you'll have made (and spent) $800 and your account balance will still be $1,000.
• You could also deposit $1,000 into the same account and leave the interest earned on deposit. After 20 years, the account value will be about $2,200. You made $1,200, instead of $800,simply by letting the earnings compound.

IRAs: Not just for old people

Because you're employed, you're allowed to make contributions to a Traditional Individual Retirement Account (IRA) or a Roth IRA.

• Contributions to a Traditional IRA are usually tax-deductible, but your income may be too low for the tax deduction to make a difference. The earnings you make on your IRA funds don't incur any taxes until you start taking the money out-which isn't allowed until you're 59½ years old.
• Contributions to a Roth IRA aren't tax-deductible, but you have more freedom to take money out without penalties. You can generally remove contributed funds, but the earnings have to stay put (because you aren't paying taxes on them). When you reach the ripe old age of 59½, your distributions are tax-free. Cool, right?

If you're thinking how dumb it sounds to lock up your money until you're 59½, remember the power of compounding. Start saving now, and you could have a sizeable chunk of cash set aside by the time you're 60. That means that you can enjoy those freewheeling summers once more.

Hopefully, you're thinking about opening an IRA and stashing some money away. At least talk to your parents about the idea-because, unlike reality TV stars Ryan Sheckler and Lauren Conrad, you don't already have it made.