Talk financial terms with your teens – Part 2
Let’s have some “funds” getting know the financial terms mutual and target funds, and traditional and Roth IRAs.
In Part 1 of this series, we covered the financial terms certificate of deposit (CD), stocks and bonds. We’ll now talk about funds and explore how you can put stocks and bonds together in collections or a portfolio to best work as a savings for retirement. Although youth may not be thinking of retirement now, they hold a great advantage if they start early. Have the conversation with them now and prepare them to be money-wise for the future. Here are some “fund” terms to consider: mutual fund, traditional IRA, Roth IRA and target fund.
Mutual funds are investment strategies that allow you to pool your money together with other investors to purchase a collection of stocks, bonds or other securities that might be difficult to recreate on your own. This is often referred to as a portfolio. The price of the mutual fund, also known as its net asset value (NAV), is determined by the total value of the securities in the portfolio divided by the number of the fund's outstanding shares. This price fluctuates based on the value of the securities held by the portfolio at the end of each business day. Note that mutual fund investors do not actually own the securities in which the fund invests; they only own shares in the fund itself.
Traditional IRA (Individual Retirement Account). According to Investopedia, a traditional IRA “allows individuals to direct pretax income toward investments that can grow tax-deferred. The IRS assesses no capital gains or dividend income taxes until the beneficiary makes a withdrawal. Individual taxpayers can contribute 100 percent of any earned compensation up to a specified maximum dollar amount. Income thresholds may also apply. Contributions to a traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status and other factors.”
Roth IRA. According to Investopedia, Roth IRAs “are funded with after-tax dollars; the contributions are not tax deductible – although you may be able to take a tax credit of 10 to 50 percent of the contribution, depending on your income and life situation. But when you start withdrawing funds, qualified distributions are tax free.”
Target funds. According to Investor.org, target funds are designed to be long-term investments for individuals with particular retirement dates in mind. The name of the fund often refers to its target date. Most target date funds are designed so that the fund’s mix of investments will automatically change in a way that is intended to become more conservative as you approach the target date. Typically, the funds shift over time from a mix with a lot of stock investments in the beginning to a mix weighted more toward bonds.
In Part 3 I’ll show the play cards – those pesky debit and credit cards that can cause trouble for many teens.
For more information on fiscal management or youth money management, please visit the Michigan State University Extension and Michigan 4-H Youth Development websites. Other resources you may find useful include the “Financial Manual for 4-H Volunteers: Leading the Way to Financial Accountability” and the “Financial Manual for 4-H Treasurer: A Guide to Managing Money Wisely.” As a part of our work, Michigan State University Extension provides financial literacy programming.