Teaching Teens about Money

A teenager’s attention span is short at best, and if it doesn’t interest them, than it’s closer to nil. Couple that with ‘advice’ from an adult, and you begin to understand why so many American adults are so far in debt.

From an early age, we are taught that money is power.  A child wants, and wants, and eventually, every adult uses some variation of the crutch, “It costs too much money”. Since all children and teenagers know everything, this translates to “I need a bunch of money so nobody can tell me what to do.” Certainly, not a good lesson, though the child is usually receptive, at this point, to earning money around the house. The first step in any investment strategy.

As your child or teen begins to accumulate her wealth, two lessons are vital. Most parents do quite well with the first lesson, which is Save. It is also vital to instill the next lesson. Spend. Kids are about fun, and doing fun things. That usually involves money. Besides, what fun is having a Million Dollars if you don’t ever get to spend it? Which brings you to the next step:

Instead of just telling them to go spend their money on anything they want, teach them to Allocate their funds. Divide her money into short term, mid term and long term goals. Remember also to allocate some for pocket money.

Use Percentages. Instead of putting aside $10 dollars each week for a mid term goal, put aside ten of fifteen percent. Expect her goals to change, possibly often. As she begins to sharpen her focus on specific items, however, assign values and costs to those items. A car at 18 can cost several thousand dollars, before including upkeep, repairs, insurance, and of course, gasoline. This is a popular long term goal among early teens. A new laptop computer can cost from $600 to $1,500 dollars. A suitable mid term goal. And that new gaming console, or cell phone, at a few hundred dollars, is an excellent short term goal.

Set a timetable. Your 14 year old wants a car when she turns 18 and graduates, a new computer when she turns 16 for her sophomore year, and a new phone for Christmas 6 months from now. If that car she wants costs $5,000, she can easily become discouraged by that big number. So break it down. 4 years is 48 months, or 208 weeks away.  $5,000 ÷ 48 months is roughly $100 dollars a month, or $24 a week. Suddenly $5,000 isn’t so daunting. Do this for all her goals, and see how much she needs to earn each week or month.

Get her off to a good start. Coming up with $50 a week can be tough for a 13 or 14 year old. Not yet old enough for the workforce, and too much to get from doing chores. Hopefully, your child has some money saved in piggy banks, or even in a bank savings account. Gather up what she has and apply it to the grand total needed, properly divided into goals, and re-examine the capital needed each week. 

Finally, explain the importance, and difference between mad money, and emergency money. Mad money is an extension of your pocket money. Little bits squirreled away over weeks or months, to be used when you just want to get away, be by yourself, or just treat yourself to something special.

An emergency fund, on the other hand is a long-term, continuously growing, untouchable account to only be used in the event of, well, an emergency. A good rule of thumb, even when they are older, is to have 3 months of expenses in reserve.

Here then, are a few conversation starters to get your teen interested in finances, and savings.

Ask her, “If somebody offered you a job that only lasted for 30 days, would you rather be paid $100 dollars a day for 30 days, or be paid a penny the first day, and then twice as much as the day before, every day after? The majority of people would take $100 a day, or $3,000 dollars for the month. Yet the person taking the penny the first day, .02 the 2nd, .04 the third and so on, would have 5,368,708.80 on day 30.

Or, ask them what they think of as the average retirement age? And when they want to retire? If they invested $1,000 one year from today, (just $20 a week!), and could double their money every 5 years, how much would they have, when they retire. (Note, the total doubles every 5 years, so 1,000 becomes 2,000 becomes 4,000, 8,000 etc.). Now, how much if they invested $5,000 dollars in one year?

After they figure out that $5,000 can be come a million in 8 doubling periods, or 40 years, ask them if they would like to have a Million Dollars at age 65? Then introduce them to DRiP’s, or, Dividend Re-investment Plans, and the Power of investing.