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Helping Teenage Finances: Learning To Save and Invest

By Teresa Dixon Murray

If you haven’t taught your teenagers much about money, you’re not alone. Nearly two-thirds of parents would rather talk with their children about sex than finances.

Those findings should send a wake-up call to parents nationwide, says Tim Massey, the Midwest Regional President for BMO Harris Bank, which conducted this survey in March. Moreover, talking to your teens about money doesn’t have to be difficult, Massey says. If you take the time to help them understand the difference between wants and needs, they’ll learn to save, budget, and invest.

“If a young child in the checkout aisle says, ‘Mommy, I want that,’ and he always gets it, that’s a bad thing,” he says.

Teaching teenagers to avoid impulse buying with small things like candy bars will help them to avoid tomorrow’s immediate gratification of bigger purchases, like fad tennis shoes, a big-screen TV, or an expensive car.

Whether it’s for a new baseball glove or a car, talk with your children about how they can save from their allowance, birthday money, and part-time jobs. Next, help them calculate how much money they’ll need and formulate a budget to reach their goal. Then, help them comparison shop.

Teaching Teenage Investments

Kevin Gallegos, a vice president with Freedom Financial Network in Phoenix, says parents should encourage teens to save a percentage of their money— whether it’s 10 or 50 percent—so that saving becomes a habit.

“Then, they’ll see the idea that savings always comes first,” Gallegos says. “That’s a lesson in society that we haven’t learned very well—paying ourselves first. But, getting into the habit of saving sets you up for life.”

You can help teens appreciate this by showing them how easy it is for a teen to become a millionaire. It was that lesson that helped motivate Nick Sowa, 18, to save and invest.

Nick’s high school economics teacher showed how high school students could reach $1 million in savings by investing only small amounts at a young age and riding the wave of compounding interest. According to financial literacy guru, Dave Ramsey, an 18-year-old who invests $2,000 a year until age 26 and never puts in another dime, will have $2.3 million at retirement. On the other hand, an adult who starts investing $2,000 a year at age 27 and continues for 39 years until age 65 will accrue only $1.5 million.

Teens can appreciate that math. It certainly set off a light bulb for Nick. “I was hooked,” he says. He has since started investing. While he made $2,400 in one pharmaceutical stock this year, he also focuses on long-term retirement investments.

Joe Jennings, Investment Director at PNC Wealth Management, says parents can start out teaching teenagers about investing by using companies that children know, such as Apple or Disney. This will help them to understand why a company’s stock might go up or down. For example, a hot new tech product might push up Apple stock. Or maybe a lousy season of weather could hurt Disney.

Additionally, encourage teens to invest in individual retirement accounts. If your teen is under 18, you can open a custodial account for them. However many investment companies and brokerages won’t open accounts for minors, several will, including Charles Schwab, T. Rowe Price, Vanguard, American Century, E-Trade, and TD Ameritrade.

Policies on minimums to open or invest vary. There’s no minimum opening investment at TD Ameritrade. Schwab requires $100. Virtually all encourage regular contributions, which you can set up through monthly deductions from a bank account.

While more and more schools are teaching the basics of saving and investing, reinforce these lessons at home, says certified financial planner Craig Schmith, of Durham, North Carolina.

It’s been more difficult for many parents to talk with their children about money the last few years, Schmith says. Many parents lost their jobs. Retirement accounts took a beating. And some have run up credit card debt.

But, if you don’t talk with your children about finances, he says, they’ll rely on information from friends and the Internet. Schmith also recommends that you sign up for budgeting services, such as Mint.com. Then they can see how saving and budgeting works with their own finances.

The best lessons are taught by example. Jennings recommends that you share some household financial information with your kids. How you save every month, prepare for unexpected expenses, and sometimes put off purchases.

Teresa Murray

Teresa Dixon Murray is a financial reporter for the Cleveland Plain Dealer.