Four Costs Your Teens Should Never Cut

Cutting expenses is always a good idea. But there's such a thing as cutting too far. Just ask the genius executives at BP and Toyota, where aggressive cost containment almost certainly contributed to the largest U.S. oil spill and one of the largest product recalls in history. Lessons from corporate disasters such as these can be applied at home, and even passed on to your kids.

Cutting too far would seem to be an irrelevant concept for most young adults, who as a group spend more than they should and show signs of reverting to pre-recession levels of instant gratification. Many are falling into debt before the age of 18.

Collectively, teens could smartly save tens of billions of dollars a year just by dialing back on electronics and designer clothing. But sick gadgets and off-the-hook outfits are the last things that young adults will choose to cut when their debts catch up to them. They are more likely to slash essential investments in their future, which is why the discussion is worth having.

Here, then, are four things your nearly adult children should never cut, lest they set the groundwork for their own personal oil spill:

· Education. This is obvious. A college degree is worth somewhere between an additional $300,000 and $1 million in lifetime earnings. To get an idea what college might be worth to your teens, in cold hard cash, check this calculator. It may make perfect sense to choose a state university over a more expensive private university if your teen is shooting for a moderate-paying career like teaching or law enforcement. But it almost never pays to drop college, save the tuition and launch a career.

· Insurance. New laws have extended your child's eligibility for dependent medical coverage under your plan to age 26. But if you don't have coverage there are options, including Medicaid for those who are eligible, and Chip Insurance and coverage through just about any college. Investing in good health is never up for review. That goes for buying sufficient auto insurance too (though you may cut costs by accepting a higher deductible) and disability insurance for a child who has entered the workforce.

· Credit-card debt. Okay, cut it...puleeeze. But your young adult children should not eliminate debt altogether and then shut down their accounts. Their credit score will suffer. Ideally they should never charge more than 30% of their available credit and pay the balance in full each month. But from a credit score standpoint, it's not a terrible thing to revolve 5% or so of the balance while making timely payments.

· Savings. How many times can I say it? The earlier your children start saving the more time their money will have to grow, and the greatest impact of compound growth comes in the later years. Money saved in their 20s is worth 12 to 15 times more than money saved in their 50s. They should open a Roth IRA as soon as they have wage income and commit to funding it on a regular basis -- even if it means no new Louboutins this season.

If you have a question about kids and money, I'll get the answer. Email me at dankadlec@dankadlec.com.

Photo courtesy Flickr user fibonacciblue