It feels just like yesterday when my daughter Nina turned one year old and was an adorable chubby little girl. She will turn 13 in three months! She loves reading, skiing, tennis, travel, choir and piano. Lately I find her watching Youtube videos on Minecraft for hours and she has created some intricate theme parks with rollercoasters and petting zoos. As a parent, I feel the urgency to teach her important skills before she goes off to college. Financial literacy and money management skills are critical for her success and happiness. So this blog post is written for her and other teens in your life.
- Write Down Your Needs vs. Your Wants. It's easy to spend money. What's not easy is spending money wisely. One way to help you spend money wisely is to separate your wants from your needs and spend money primarily on your needs. Try to think of the needs as immediate and what you will need in the next few months. Write down what you need with those costs in one column and write down what you want and those costs in another column. Ask yourself "Can I do without these wants?" and "Are there alternatives to my wants?". For example, you have decided that you need a cell phone. Is a used cell phone an alternative to a brand new cell phone freeing up money to spend on other items you need? Writing them down helps you prioritize your spending.
- Start the Savings Habit. Starting to set money for the future aside now, while you are young, can start a lifetime of healthy savings. You brush your teeth twice a day and you don't even think about it because it has become a healthy habit. So now, when you have any income, put away some money for the future. This will go towards goals such as buying a new software game (a short-term goal), a laptop computer (a longer-term goal), a rainy-day fund and college expenses. A rainy-day fund can prepare you for unexpected opportunities such as going to see your favorite musician, or attending a special school event. Once you have developed the savings habit, then later when you have any earned income from a job or a business, it comes naturally for you to save for the long term, including funding a Roth IRA for retirement.
- Create a Budget. You may already have some income from weekly allowances (say, $13 per week for a 13 years old), birthday money from relatives, and you may have a part-time job when you are older. As you create a monthly budget, start listing all your income first, then list savings and expenses. "Pay Yourself First" means you must set your savings goals such as saving for a computer before listing fixed and variable expenses. Your total income should equal your total savings plus expenses. To balance the budget, you must focus on your discretionary expenses by spending money on the things or experience that bring you joy and cutting out the expenses that may be impulse purchases such as candies and snacks from vending machines.
You must track how you spend money by writing them down on a notepad or using something like a Google spreadsheet. You should regularly compare your actual expenses to your monthly budget, and make adjustments to stick to your budget. This is how your budget will help you achieve your short-term and long-term goals. When you have more money saved, then you will get a debit card and start learning how to use a debit card and tracking expenses, perhaps by using free budgeting tools online such as www.mint.com. A debit card lets you buy things online, but you must have enough money in the bank first, unlike a credit card. When you have developed a good habit of not spending the money you don't have, then you can have a credit card to create a solid credit score over time.
- Be Careful with Credit Cards. When you go to college, you may find credit card companies often entice you to sign up for their credit cards. They will try to convince you that a credit card is like having free money for you to spend while you only pay the minimum amount each month. This money mindset can be very dangerous, as you are more likely to rack up credit card balances quickly and become inescapably trapped in a high interest rate nightmare.
For example, a $3,000 credit card debt with an 18-percent interest rate will take nearly 22 years to pay off making only minimum payments, with more than $4,100 in interest charges accruing over that time! Before you charge the card, you must have the money in the bank to pay off the credit card balance on time each month. If you are late in payments, you will pay the late penalty and that will negatively affect your credit score. A high credit score lets you take out a car loan, or even a mortgage to buy your first home, at a low interest rate in the future, saving money on the interest you will pay over time.
- Be a Smart Shopper. Plan ahead weekly by making a list for groceries and stick to the list. Consider using recipes that use low cost, healthy ingredients such as tuna, eggs, beans and lentil. Eat before you shop to avoid impulse purchases. Compare prices online, especially on clothing and shoes. Take college classes in high school when they’re free or cheaper. Some day when you start looking for the right college, you will do more research online, talk to counselors and visit some colleges. By taking some AP classes now, you can finish college early and save tons of money.
- Get a Job. In order to increase your income and gain valuable life experience, you can get a part-time job when you’re old enough, or start a side business that matches your skills and what you enjoy doing. If you like taking care of kids, you can be a babysitter. If you love dogs, you can walk dogs for your neighbors. If you enjoy being in the garden, you can pull weeds, plant vegetables, grow flowers and mow the lawn. If you can bake great cookies and muffins, you can sell them to raise money. Having these work experiences now will help you learn problem solving and people skills which will enable you find better jobs when you grow up.
- Study Savings and Investments. Few people ever become wealthy based entirely on the salaries they earn. Savings and investments over time are what generate long-term prosperity. A savings account with a bank pays you interest, not high interest, but the money is liquid and safe so you can access it easily to pay for expenses in the short-term. Investments (stocks, bonds and real estate) can potentially earn higher returns over time but the value can vary greatly. For example, if you have five to six years before college, you can use investments including stocks and bonds that may earn 4% to 6% annualized return instead of putting all your savings in a savings account, earning less than 1% interest. If your parents haven't started a 529 plan (college savings plan) for you yet, discuss how much a 4-year college education will cost and how you can help to increase savings to the 529 plan, because the money put in it can be invested and later withdrawals to pay qualified expenses are tax free.
In addition to financial literacy courses in your school, you can use resources online such as www.TheMint.org to learn more.
- Understand the Magic of Compounding. Answer this trick question: "Would you rather have $10,000 per day for 30 days or a penny that doubled in value every day for 30 days?" Today, we know to choose the doubling penny, because at the end of 30 days, we'd have about $5 million versus the $300,000 we'd have if we chose $10,000 per day.
Compound interest is often called the eighth wonder of the world, because it seems to possess magical powers, like turning a penny into $5 million. The great part about compound interest is that it applies to money, and it helps us to achieve our financial goals, such as becoming a millionaire, retiring comfortably, or being financially independent. In order to use the compound interest most effectively, you should start investing early, invest as much as possible, and attempt to earn a reasonable rate of return.
- Time is On Your Side. The earlier you start investing, the better off you'll be. Let's consider the case of two investors, Lily and Anna, who'd like to become millionaires. Let’s say Lily put $2,000 per year into the market between the ages of 24 and 30, that she earned a 12% after tax return, and that she continued to earn 12% per year until she retired at age 65. Anna also put in $2,000 per year, earned the same return, but waited until she was 30 to start and continued to invest $2,000 per year until she retired at age 65. In the end, both would end up with about $1 million. However, Lily had to invest only $12,000 (i.e., $2,000 for six years), while Anna had to invest $72,000 ($2,000 for 36 years) or six times the amount that Lily invested, just for waiting only six years to start investing. It's clear the magic of compounding can work magic when you have more time.
In addition, when you have more time, you have capacity to take greater investment risks to aim for higher returns, because your portfolio has enough time to recover from stock market downturns.
- Give Generously. When you share your toys and games with your friends, it's a lot more fun than playing with them by yourself. There are many people in this world who are less fortunate and need some assistance to get back on their feet. In addition to giving to your church weekly, you can do some research online to find the causes you want to support by using www.charitynavigator.org.
As you work on your monthly budget, consider allocating your income between these four categories: Save, Spend, Share, and Invest. You can start with 30% Save, 50% Spend, 10% Share and 10% Invest.
You can always share your time to help others by volunteering and donating clothes, books and toys to local charities. Ask your parents and the people you respect about the causes they support and get involved.
Parents, I believe you should teach money management skills early by sharing your own money stories. Tell them about the mistakes you have made and the lessons you have learned. Be open to sharing your challenges in earning money and paying for unexpected expenses. Setting good examples yourself by following disciplined savings and investing principles will help you raise financially savvy kids. Of course, your kids will make some mistakes and pay the price. That's ok, as they will remember what you have taught them and after all, you will be cool again when they become adults and parents.