To instill good money habits in young kids, you often have to disguise the training as a game. But when it comes to making an older teen smarter about money, there's no teacher like experience.
Give your child over 15 the chance to participate in everything from the ups and downs of the stock market to the power — and scourge — of compound interest. "It's similar to teaching them how to drive a car," says Carrie Schwab-Pomerantz, president of the Charles Schwab Foundation, a nonprofit dedicated to financial literacy. "You want them to practice under your watch." Money lessons are particularly important for kids 15 to 18, since they're preparing to become independent and their financial futures will hinge on the choices they make.
The Power of Compound Interest
Albert Einstein called compound interest “the most powerful force in the universe.” But it can be tough to get a teenager to put money in the bank regularly when shoes or Powerbooks are beckoning from the mall. And it’s particularly hard when you’ve got a born consumer on your hands.
That’s the challenge CNN financial host Clark Howard faced with his oldest daughter, Rebecca, now 20. When Rebecca got her first job at 15, her dad encouraged her to save a portion of the pay in a retirement account. She wasn’t interested — until he said he’d match every dollar she put away.
“You can’t tell a 15-year-old, ‘Hey, 50 years from now, if you put in a dollar, it’ll be worth 11 dollars’ and expect them to get excited,” says Howard, author of half a dozen financial books. “But if you can say, ‘If you put in a dollar, I’ll match it, and you’ll have two dollars,’ they get that right away.”
Rebecca now has a healthy IRA. Says dad: “She’s my spender. She wouldn’t have saved otherwise.”
Debt Management Through Credit Cards
It’s also important to let your teen learn the flip side of compound interest: Credit card finance charges can snowball if the cards aren’t used responsibly. This is why Schwab-Pomerantz makes sure her kids get credit cards as soon as they get a driver’s license.
“I want them to have a credit card when they start driving so they have access to cash if they have a breakdown or run out of gas,” she says. “I also want to sit down with them on a monthly basis and show them what happens if you don’t pay the balance in full or don’t pay on time.”
To drive home to teens the dangers of charging more than you can afford to pay back, Schwab-Pomerantz has a credit card payoff calculator on Schwabmoneywise.com, her company’s Web site for teaching young adults about money. One example: If you pay just $100 a month on a $5,000 credit card balance with an 18 percent interest rate, it will take nearly 8 years to get rid of the debt, and you’ll rack up an astounding $4,400 in interest. But, if you pay $181 a month, you can vanquish the debt in three years and save $2,884 in interest.
A Healthy “Spending Diet”
Jill Suskind, founder of WealthQuest for Teens, says this age is the time to start emphasizing the differences between wants and needs. Often, teens equate discipline with deprivation. Concert tickets are not a necessity, a parent may argue. But they may be a high priority to a teen.
To head off a fight over colliding viewpoints, Suskind suggests you have your kid talk through his priorities. Then, help him develop a spending plan to get the things that matter most to him, perhaps with your financial assistance. Expensive items will require saving over time, but he’ll see that eventually he’ll be able to afford what he really wants. It’s like a healthy diet, Suskind says. You’re less likely to binge when you don’t feel deprived. (During The Talk, be sure your son or daughter agrees to allocate some money for charity and emergencies.)
Mike Alfred is living proof that there is no lower age limit on stock-market success. Alfred, who runs a La Jolla, Calif. investment company with his brother, parlayed his part-time job earnings as a high-school student into tens of thousands in stock-market profits, which then covered many of his Stanford University expenses.
Now Alfred teaches stock-market basics in high schools, partly by having kids play the Stock Market Game. “We spend the first 45 minutes to an hour on long-term investing, compounding money, and basic economics,” he says. “In the last 10 minutes of the lecture, we explain how to win the game.” The team Alfred coaches won the Stock Market Game’s statewide championship for two years running.
You can teach your kids about stocks by encouraging them to use a low-cost online broker to buy a few shares on their own. For a child under 18, you’ll need to get a custodial account form online and then mail it back before he or she can start investing.
Although Alfred advises adults to invest primarily in low-cost index mutual funds, he concedes these investments probably won’t interest kids as much as stocks in tech companies and retailers they know. At this stage of their lives, he adds, generating enthusiasm, interest, and understanding about investing are key to preparing kids to become responsible for their financial futures.
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- Video: What Kids Don't Know About Money
- Money Skills for Your Kids: Ages 4 to 9
- Money Skills for Your Kids: Ages 10 to 14
You may think that once you’ve dispatched your kids to college, the days of offering money lessons are over. But that’s the time when they’ll need financial advice the most, says Farnoosh Torabi, blog editor at Quicken and author of You’re So Money: Live Rich Even When You’re Not.
“Sneak a few money questions into each conversation,” says Torabi. “It’s not that different from asking about the new guy in her life. Yes, she’s 18, and she’s on her own. But it helps to have a little bit of a tutorial along the way.”
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