Updated: 3/27/2012 1:39 PM ET|
8 crucial money lessons for teens
Financial experts offer suggestions for how and what parents should teach kids about personal finance before they leave home (or get credit cards).
Who's educating American kids about money? Certainly not their schools. Probably not their parents either.
Unlike gym, personal finance is not a required subject. And in many homes, talking about money is on par with talking about sex -- "the last two taboos," as personal-finance expert Susan Hirshman puts it.
"Money doesn't grow on trees, but (kids) have no idea of how much money there is," says Hirshman, the author of "Does This Make My Assets Look Fat?"
How could they know? Their parents bank and pay bills online; they cover most daily expenses with plastic. There's not much talk of mortgage versus income or retirement accounts or how to shop for the best deals.
How many mistakes might our children avoid if they took PF along with PE? Or if we, their parents, took the time to model and explain sound financial practices?
I asked a number of personal-finance experts what they thought kids should know before leaving the nest. Here are eight of their answers.
Parents: If your teens don't know these things, you'd better start talking.
1. Know where the money goes
Hirshman, a certified public accountant and certified financial planner, recently worked with a 20-something couple who had $100,000 in student loan debt. These ducklings had Ivy League educations yet couldn't figure out why the books wouldn't balance. They knew exactly why after Hirshman showed them how to track their spending.
"All of a sudden they looked at each other and said, 'Oh, we can't go (on vacation); we really shouldn't be going out to dinner every night,'" Hirshman says. "Until you see it on paper, it isn't real."
Whether they use pen and paper or personal-finance software, it's vital that your kids know how money gets spent -- their own money, that is. Jean Chatzky, the author of "Not Your Parents' Money Book: Making, Spending, and Saving Your Own Money," has said she requires her two teenagers to pay for things such as movies, snacks, video games and gasoline out of their weekly allowances.
Those aren't huge allowances either. Thus the youths are "forced into the position of having to choose among things," Chatzky said. As adults, they'll have to do this all the time.
2. Save/invest early and often
Not only do your kiddies need emergency funds, they're probably going to be responsible for their own retirements.
The good news? Compound interest. If they each invest $2,000 a year from age 21 to 31 and leave the money there, they'll end up with bigger nest eggs than someone who invests the same amount per year from age 31 to 65 (assuming rates of return are the same). In your 20s, with time on your side, you have a huge financial advantage.
Parents can encourage saving and investing by requiring kids to tuck away a certain percentage of their allowances and earnings from part-time jobs. Make it a condition of their being employed at all.
And yes, they should be working, even if it's just baby-sitting or lawn-mowing. "By the time they're 14 or 15, they should know what it's like to bring in a paycheck," Chatzky says.
Some parents use more than one bank. If that's you, teach your kids to pay all their bills from one location. Otherwise "it's easy to delude yourself" about total expenditures, according to Manisha Thakor, the author of "Get Financially Naked."
Thakor likes the image of online banking as an air-traffic-control tower, with bills and expenses as planes zooming at you. "If you don't have a command central to monitor that, you could get yourself in trouble," she says.
Bank tools such as low-balance alerts (although you should be aware of every transaction) and automatic minimum monthly payments (which you'll of course override each month and pay in full) prevent the additional expenses of overdraft charges and late fees.
Naturally, you'll teach your kids to automate a portion of each paycheck into savings.
3. Spend less than you earn, thoughtfully
"Think of yourself as a small business that generates income every month, and live within your means so you have a positive net income," says Claudio Ghipsmann, a former investment banker who wrote "Making Bank: The Personal Finance Lessons They Never Taught Us in School."
This is about spending less than you earn, but it's also about making careful choices: Lease a hot sports car or buy Old Reliable? Live on your own or with a roommate? Extra dollars unwisely spent represent lost investment potential. (Remember your new best friend, compound interest?)
Prepare your kids by showing the ways you strive to save. Explain that you pack a lunch a few times a week to save $100 or more per month. Suggest they help you look online for a better auto insurance rate or cellphone plan.
Or let them watch you pay the bills, a hands-on lesson in budgeting: what's earned versus what's owed.
"Show the kids on paper: 'This is what we bring in after taxes. This is what we pay on the mortgage,'" says Sharon Lechter, the founder of the financial literacy organization Pay Your Family First and a co-author of "Three Feet from Gold."
4. Deeply dislike debt
Unfamiliar expenses -- interview suits, utility deposits, car payments -- hit hard when you're just starting out. Simply setting up housekeeping can be a shock to someone who's never bought groceries or put quarters into washing machines.
You don't want your kids to use this as an excuse to run up the credit cards. Teach them that indebtedness limits your options. (Want to go back to school, change jobs, have a baby? You can't. You've got payments to make.)
5. Shop around
Of course, we do need to buy certain things. Might as well get the best price for them. So 20-somethings should know: Don't buy the first car you test-drive. Don't sign a lease for the first apartment that strikes your fancy. Don't assume that a "sale" price is the best price for a mattress or that interview suit.
It's never been easier to find great deals or make informed choices:
- Online price-aggregator sites like PriceGrabber and Bizrate combined with online discount codes help shoppers pay less for just about everything.
- Social media are good for posting queries ("Anybody know an affordable auto mechanic?").
- Consumer websites give information on the best beds or how often a particular model of car typically winds up in the shop.
When they're young, teach your kids how to seek the best prices on a new video game or pair of sneakers. It's also a good idea to require them to pay some or all of the cost of nonessential items.
"What will happen, nine times out of 10, is that they'll get the money and that video game isn't what they want anymore," says Lechter. This lets you discuss the notion of impulse buying.
And if Junior still wants that video game? He's learned the value of work and/or delayed gratification.
6. Live like a student
That first apartment doesn't have to look like a magazine ad. If an old car runs great, keep it. And, for heaven's sake, don't be an early adopter of the newest tech gadgets.
Kids who grow up seeing home redecorating and remodels, new cars every two years and constant tech upgrades assume this is the way all adults live. Parents need to make it clear that they have these things because they can pay for them.
(You can pay for them, right? If not, you're teaching an entirely different lesson.)
According to certified financial planner Nicole Rutledge, plenty of young people expect to re-create the lifestyle to which they've become accustomed -- as in the day they after they graduate. Wrong.
"(Your parents) most likely struggled with saving, too, and didn't accumulate a lot of material goods at first," says Rutledge, a senior adviser with Resource Consulting Group in Orlando, Fla.
Your kids need to be told -- or better still, shown -- that living comfortably on a limited budget can be a test of creativity. Put together parties and potlucks with friends. Check out gallery openings or free movie screenings.
7. You're not alone
Plenty of young people are trying to live large on limited funds. Your college student can learn from their blogs, tweets and Facebook posts.
"We're in a social-media generation. Get into the practice of including (online) personal finance into your everyday life," says Thom Fox, who wrote "Learn Now or Pay Later," a financial-literacy series for the nonprofit Cambridge Credit Counseling.
Subscribe to PF blogs. Listen to podcasts. Trade ideas with others in the same position.
8. Dream big and small
Goals can be modest ("I want $20,000 in net worth in the next five years") or major ("I want to retire at 50"). But they won't happen unless you identify them.
How to teach your kids to dream in this way? Tell them about goals you've accomplished and what you're doing to reach current ones. Ask them what they hope to see in their own futures. Brainstorm the possibilities.
"By all means, live a bit for today," says San Francisco Bay Area certified financial planner Lynn Ballou, "but have a long-term vision."
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Do as I have done to help kids understand money. They get information in school but things on paper really are different in the real world. When each of my children turned 16 they got their driver license. For the next 3 months they did all of the running around taking sisters or moms to work or doctors or to practices. When they turned 18 or the middle of their senor year they would be given the bills and my paycheck to balance the money for 3 months. They had to plan food, they planned oil changes for the cars, they planned everything for the 3-4 months. This was a big insight for where things go and how fast things change. I had one daughter refuse to get her driver license until she turned 18 and got a job. 13 kids in the house and they all had some sports or plays to go to. A good ON THE JOB TRAINING for young people. Just a good way to learn things.
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