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Teach Your Teen Financial Responsibility

Six Life Lessons You Should Instill Before They Leave Home

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Face it. In a few short years, your teenager will be on their own, making their way through the world. One of the biggest advantages you can give him or her is a basic education in finance. If your teen can manage their own money, they will have a higher standard of living, won't have to call home for cash (giving them a greater sense of independence while easing the burden on your checkbook), and have the freedom to choose their path without worrying about student loans, car payments, or credit card debt.

Your Level of Freedom is Closely Tied to Your Level of Debt

An excessive debt level is the life equivalent of handcuffs. One of the biggest financial dangers for young adults is taking on too many "bargain" deals such as zero-down financing, no payments for twelve months or other similar gimmicks offered at furniture stores, home improvement retailers and automobile dealerships. Often, they are deceived by the ease of credit and instant gratification of purchasing without taking the money out of pocket today. Sooner or later, however, they are going to end up paying the cost of the items and possibly much more in interest.

Teach your teen to focus on the cash flow impact of a major purchase and to avoid recurring financial commitments at all cost. A young adult with a moderate lifestyle consisting of only a cell phone bill ($50), car payment ($275), insurance ($100), and rent ($500) is looking at monthly outflows of $925! In other words, $11,100 of his or her annual income goes to merely maintaining a car, phone and roof over their head. After factoring in living expenses such as clothing, gas, cable, and food, it becomes clear a young adult in this position probably doesn't have a lot of cash to spare if he or she has any ambition to build an investment portfolio, save for a down payment on a house or go to graduate school (for smart strategies on saving, read Pay Yourself First and 7 Rules of Wealth Building).

Avoid Credit Card Debt Above All Else

Credit card debt is brutal. If a young adult is making 4% on a passbook savings account but paying 20+% interest on his or her credit card balance, it is costing them 16% for the right to earn 4%. This is one of the stupidest things he or she can do. Instead, they should take their available resources and pay off the balances, only investing after they have extinguished double-digit rates from their life forever. Other debt, such as student loans, mortgages, etc., depend upon an individual's specific circumstances. For help with deciding which debt must go and which can stay, read Pay Off Your Debt or Invest?.

Open an IRA and Contribute to it as Young as Possible

The day your teenager turns eighteen, he or she should open an IRA. In Six Steps to Retire Rich, I point out that a 40 year old investing $20,000 a year for retirement will end up with only half of the assets as a 21 year old who invests $5,000 a year. Even the smallest savings can turn into a respectable fortune if given enough time.

Choose Your College Wisely

In most cases, there is very little difference between a $30,000 private college and a $12,000 state university. What matters is what you do with your degree, not the name attached to it (except in highly-specialized fields such as law or medicine). Strapping yourself with an extra $64,000 in debt can seriously change your plans for life. Several months after graduation, you will be forced to make your first student loan payment. This could result in taking a sub-par job for the sake of an income at the expense of a better opportunity later.

Beware the Small Foxes

It's been said that small foxes spoil the vine. The financial success of every young adult is largely determined by their mundane, day-to-day decisions. If he or she purchases a $500 television, they're likely to go to several different stores, compare prices, and find the best bargain. Without thought, however, they may spend $50 at a restaurant, $5 at the gas station buying a coke and newspaper, $10 at the movies, $85 for a sweater at Banana Republic, $20 for a candle, $30 for a book, $5 for a drink at Starbucks... you get the picture. Those small expenses are fine by themselves, but over time they add up to significant amounts. Without knowing it, a young adult in this situation has unknowingly been spending his or her millions $1 at a time. By cutting only $3 a day and investing it, a young adult can be a millionaire by retirement.

Know the State of Your Flocks - Use a Software Program to Track Your Finances

King Solomon, the wealthiest man in history, once said, "Be diligent to know the state of your flocks, for riches do not endure forever". Personally, I prefer Microsoft Money for the task. It is inexpensive, easy to use, and can automatically download stock and mutual fund quotes from the Internet, giving you up-to-date account balances.

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