As many people progress through their teenage years they start to realize that they can work to make some extra money. Some teenagers will get part-time jobs after school; others will only work during the summer months. Regardless of how or when they earn their money, most of it is simply disposable income. They see it all as spending money, and for the most part they will all spend it. But in order to grow into financial savvy adults, they should start out as financially savvy teens. By instilling the values of money at a young age, they will learn that setting aside a little bit of money now will ensure they can have fun when they are older.
The biggest misconception that plagues teenagers is that if you set aside a few dollars today, you will have a few dollars in the future. Compounding interest is not taught very much in the schools, and it is a difficult concept to grasp since age 50 or 60 is so far off for many people. Personally, I knew of the concept when I was a teenager, but I didn’t fully grasp what investing at 8%-10% would do for me until I was in my early twenties. By that time I had missed out on quite a few years of compounding, and when I finally started, I didn’t invest nearly as much as I could (or should) have.
Time Value of Money
Going right along with compounding interest is the concept, time value of money. A dollar is worth more now than it will be worth tomorrow. Teens need to understand that inflation will eat away at their buying power, but if they invest they can usually earn a rate of return that is far above the inflationary rate. This means that the more they invest now, the less they have to invest later.
In order to have the money to invest, teenagers need to be encouraged to get summer, weekend, and after school jobs. Going along with the encouragement needs to be a discussion about having a career. By working part-time they do not understand the concept of working long hours, year-after-year; thus they do not understand the need to set aside money for retirement. You can help them by explaining if they start investing at age 15, they could be able to attain that goal of retiring at age 50.
I am not a huge fan of budgets. I only loosely design my own. But then again, I keep a close eye on my finances, and I have nearly everything automated so I do not have to worry about forgetting bills or failing to invest. A teenager should not have any problems budgeting. At most they will have savings, spending money, car insurance, gas money, and a cell phone that they have to pay for. The concept of paying yourself first is huge in this instance, because most teens lump nearly everything they earn into the spending money category.
Many young people feel that they cannot save very much because they have been cheated out of the good paying jobs. They have to work for minimum wage, and as a consequence they are unable to save as much as they should be able to. But saving $100 per month will only require them to pay themselves 4 hours worth of work per week; even if they make minimum wage. By instilling a long-term value in them now, parents can help their teens be in a much better financial position than they ever were.
What lessons do you feel are important for kids to know about money?
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