teens and money

This Is How Rich You'd Be If You'd Saved the Money You Earned in High School

Marla Walters — Wed, 25 Feb 2015 14:00:04 +0000

In 1978, the summer of my junior year in high school, I was offered a job at a Kentucky Fried Chicken franchise. It was owned by a family friend who needed more staff. My parents thought it would be a good first "summer job," and so I began working. The job paid the California minimum wage of $2.65 an hour. It was fun, at first, since all of my coworkers went to the same high school, and we passed the time by goofing off and chatting a lot.

But when I began receiving my checks, I was shocked at the difference between what I thought I would be earning, and what I actually took home. My father, a math teacher, explained the hard financial facts to me.

I wish he had explained this one: compound interest. (In retrospect, he may have decided that arguing with a headstrong 16-year-old was not picking his battles wisely.)

What is compound interest? Basically, it means allowing your earnings to accumulate, so that they earn interest, too. And if you take advantage of its power early on, you can accumulate funds much more quickly. Read on to see how much money I'd have today if I'd saved my high school earnings.

The Power of Compounding

I was working 20 hours per week at $2.65 per hour, which, before taxes, equalled $53 per week. Over the course of a couple of years, I earned about $5,500 (gross).

Let's pretend that I had taken $4,000 of that and invested it in the stock market, earning near-average historical returns of about 10% for 37 years. (Watch this great video if you want to learn how to calculate compound interest by hand.)

My Principal: $4,000
My Annual Interest Rate: 10% or 0.10
Time: 37 years

You'll probably want to use an online compound interest calculator to do your own calculations.

That original $4,000 would now equal approximately $136,000. Pretty great, right? And if I don't touch it until the "official" retirement age of 65, I'll have over $350,000. That's more money than most Americans retire with — all from just a measly minimum wage high school job!

Had I invested that $4,000, I would be pretty tickled with myself right now. Instead, I probably blew it all on sodas, movie tickets, records, and whatever else teens were buying back then.

Advice on Compounding for Teens

So, if I were to advise a teenager right now, what would I say?

1. Get a Job

You will want to earn some of your own money. It will give you some independence, help you develop confidence, and learn responsibility.

2. Start Saving ASAP

Many banks have special "teen" checking and savings accounts. Open accounts, and decide how much you will put in each of them on payday. You'll need to learn how to manage and balance a checking account. Once you have some funds built up, open a brokerage account and invest in a target-date retirement fund.

3. Be Wary of Debt

Eventually, you may have to take on some debt, for something like a student loan or a car. Learn about interest and credit cards. Don't sign up for debt without getting good advice first.

4. Learn How to Budget

You are about to need to figure out how to make your money stretch. Start by keeping track of what you spend, and where. This is usually the point where adults start packing their own lunches and making their own coffee.

5. Educate Yourself About Investing

You should start investing as soon as your start making money. Thanks to the power of compound interest, a dollar saved today is worth much more tomorrow, so get started ASAP. Learn the basics of investing, and find a trustworthy adult, such as a parent or banker, to help you make sound choices. You'll thank me someday if you do.

Did you invest the income from your high school job? What's it worth today?

This article is from Marla Walters of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Teaching Kids About Money: An Interview with Dr. Brad Klontz

Sarah Winfrey — Thu, 24 Mar 2011 10:00:08 +0000

It’s commonly accepted that many high school graduates do not have enough education in the area of personal finance. In fact, personal finance classes are not even required for graduation by most high schools. So is it a surprise that when they get out into the world, they are susceptible to getting into credit card debt, neglecting retirement savings, and struggling financially? (See also: Getting Kids Started With the Stock Market)

It seems clear that kids need more education in these areas. But schools balk at offering it, especially in this era of financial cutbacks. They simply don’t have the space in their buildings or curriculum, and they don’t have money to pay teachers to teach these new classes. Many schools admit that personal finance education is a great idea, but they say that someone is going to have to step up and fund it if it’s going to happen.

H&R Block’s Dollars & Sense program is doing just that — offering a curriculum and scholarships for schools committed to teaching teens practical lessons about money before they’re out on their own. The company has provided more than $2 million worth of curriculum and scholarships to high schools and their students worldwide since 2009.

Recently, I had the chance to interview Dr. Brad Klontz, a financial psychologist who helped develop the program, about what it offers and what kids need to know about money. Even if your kids don’t get to participate in a program like H&R Block’s, he has some practical tips for teaching them about personal finance.

Sarah Winfrey: What will students learn in the H&R Block Dollars & Sense curriculum?

Dr. Brad Klontz: H&R Block Dollars & Sense uses Virtual Business® — Personal Finance, a curriculum developed by Knowledge Matters. Students are assigned an avatar and get to make real-world decisions in a simulation environment without the real-world consequences. The skills students learn include: budgeting and saving, choosing and balancing a checking account, getting a credit card and understanding credit, online banking, paying taxes, investing for retirement, time management, finding a job and housing, buying a car, making smart purchases, understanding insurance, and much more.

It sounds like the program focuses on “hands on” learning scenarios. How do these help students learn about money, as opposed to memorizing information on types of investments, etc.?

The simulation software is very hands on, allowing students to learn and practice key personal finance skills in an engaging, interactive environment. The curriculum combines rich visuals and animations to put these important skills into practice — they learn that if they don’t purchase food, they’ll starve; or if they spend all their money on a big-screen TV, they can’t pay rent. They can’t “undo” those choices within the lessons.

Sounds quite practical. Of all the financial lessons out there, what do you think is the number one thing that graduating high school seniors need to know about personal finance or finance in general?

It is critical for teenagers to understand the ins and outs of credit and credit cards. We require students to pass Driver’s Education before issuing them a license to drive a car; however, they can wield a credit card with no training or instruction whatsoever. Shortly after they leave home, teenagers will be offered credit cards. Without an awareness of how credit and credit cards work, they will be set up for failure.

What sort of tactics do you recommend for helping students understand using credit cards or taking on debt?

Nothing works better than direct experience. In addition to talking to teens about how to use credit wisely, parents should give their teenagers the experience of paying interest.

For example, consider advancing their allowance if they ask, but charge them interest. Currently, the average credit card interest rate for someone with bad credit approximates 25%. Since teenagers don’t have a credit history, they would be considered a higher credit risk, so 25% interest is about right. You could advance them their $20 allowance on Friday, and then take $5 out of next week’s allowance. If they take you up on your offer, the instructional moment will arrive the following week when you give them $15 instead of $20. Talk to them about how this experience is similar to carrying a balance on credit cards, where you sacrifice having more money in the future for being unable to delay immediate gratification.

Have you found any personal finance topics appeal to teenagers the most? How does the program incorporate these into what it offers?

Teenagers get very excited about the idea of compound interest. When they see how saving just $100 per month invested at 12% interest would give them over $3 million dollars by the time they are 60, it blows their minds. If all teenagers learned and practiced this very simple lesson, we would have a nation of millionaires within a generation. The simulation experiences H&R Block Dollars & Sense provides gives students the opportunity to experience compound interest versus just hearing about it.

What advice would you have for parents looking to supplement the financial education their child receives (or doesn’t receive) in school?

Because money management is often a difficult discussion for parents and teens to have, here are a few tactics parents can implement when helping their teens become smarter about money management:

Hold off on giving them advice and just listen. Or ask questions to help start the conversation, such as:
- How do you think people get wealthy?
- What are your financial goals?
- What do you worry about regarding money?
Allow your kids to experiment, make mistakes and learn from them. For example, give them an allowance, but don’t bail them out if they run out of money. This lesson provides an opportunity to examine financial missteps objectively and come up with strategies to do it differently next time.
Encourage them to think before making a purchase and to wait a day or a week before buying it. If they still want it, it’s a good opportunity to talk about a spending plan.
Model healthy financial behaviors your teen can follow. Kids learn more by what they see their parents do than what they say. For example, it’s a good idea to decide on something you want to purchase as a family. Then involve them in the budgeting and saving for it.

[End of Interview]

As Dr. Klontz suggested, there’s so much that parents can do to help their kids learn about personal finance, and these ideas are just the beginning. If you’re interested in getting personal finance curriculum into your child’s school, talk to some administrators and see if they’re willing to apply for some of H&R Block’s scholarships.

Right now, some schools have already submitted their applications to be part of this program. Until April 15, you can go online at H&R Block’s Dollars & Sense website to view these applications and vote for the school or schools that you think most deserve the chance to teach this curriculum. The winners will receive their grants by the end of the current school year. It doesn’t take long to vote, and your time goes towards helping high schoolers learn valuable financial skills.

This article is from Sarah Winfrey of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

10 Tips from a Financially-Savvy Teen

Julie Rains — Mon, 22 Nov 2010 14:00:07 +0000

A few years ago, teenager Tamara Johnson had no savings and vague plans to attend college. Today she is a freshman at Marquette University, using scholarship dollars for tuition and her personal savings to pay for living expenses.

A financial literacy program — Money Matters: Make It Count created by the Charles Schwab Foundation and taught at Pueblo of Pojoaque Boys & Girls Club — helped Tamara understand and apply the money lessons that her parents had been trying to teach her. Her enthusiasm and grasp of these financial lessons led to her selection as the 2010-2011 National Money Matters Ambassador. More recently, she became the first teen to take the Make Change Count pledge as part of a national campaign sponsored by the Charles Schwab Foundation and the Boys & Girls Clubs of America to make financial literacy more accessible to teens. Through Money Matters and life experiences, here are lessons that Tamara learned.

1. Save money now, because you’ll never know when you’ll need it later.

Now that Tamara is in college, she sees that her savings habit formed in high school is worthwhile. She has enough money to buy essentials, such as a warm winter coat, and pay for holiday travel from college in Milwaukee, Wisconsin to her home in Santa Fe, New Mexico. Tamara told me that some of her friends have just a dollar in their bank accounts, having never considered saving for later. They have to call their parents and ask for money. (See also: 7 Important Lessons Frugal Parents Teach Their Children)

2. Apply for scholarships in your junior year. Don’t wait until the second semester of your senior year.

I heard similar advice from Kimberly Stezala, author of Scholarships 101: The Real-World Guide to Getting Cash for College, who spoke with me about private scholarships. Guidance counselors may not encourage this approach, perhaps because they see so many students who have not taken basic steps to begin the college search process. Nevertheless, middle school students as well as high school freshmen, sophomores, and juniors can compete for scholarship monies. Tamara’s early start helped her to win scholarships that cover tuition payments for the next four years.

3. Learn to budget your money instead of spending whatever you have.

When she was younger, Tamara received an allowance from her parents. At 16, she started earning her own money when she went to work for the Boys & Girls Club. Before she took the financial literacy classes, Tamara was not careful with her allowance and headed to the mall right after getting her paycheck. After completing the program she realized that she should budget her money toward savings and anticipated expenses for things like gas, movies, and clothes.

4. You’ll be surprised at how easy it is to save money and how quickly it builds.

Tamara started setting aside and saving money at 16. Just a couple of years later, she had amassed nearly $4,000. She is using this money to pay living expenses and plans to rebuild and add to her savings by working during holidays and summer breaks.

5. Working together with friends to avoid spending can be fun.

Peer support is a powerful component of the Money Matters program and Make Change Count pledge. Tamara and many of her friends took the financial literacy class together and helped each other learn to put its principles of saving and budgeting into action. Sharing what you know is one part of the four-step pledge.

A few high school friends thought she was crazy for being careful in her spending; Tamara says that many people do not realize the importance of saving until they need money and have none. At college, Tamara talks to her friends about saving because they often notice that she has money to spend when they are broke.

6. Shop for bargains.

When she shopped with her mom’s money at the grocery store as a child, Tamara chose whatever she wanted despite her mom's cautions to spend more carefully. Now that she’s spending her own money for groceries and armed with financial lessons, Tamara is a bargain shopper. She notices specials and uses coupons.

7. Learn to recognize wants and distinguish them from needs.

One of the ways that Tamara identifies what she needs is to consider all of her options. Comparing a premium brand to house brand at the grocery store, for example, can show you that may want a certain (heavily advertised) brand, but you need certain foods.

8. It’s never too late to start saving.

Even if you have made mistakes and have no extra money now, you can become a saver. Though an early start is helpful, saving at any time will put you on the right path to a better financial condition.

9. Take advantage of financial literacy programs.

Sadly, most high schools do not require financial literacy classes for their students. You may need to look at electives, programs offered by outside groups (such as the Boys & Girls Clubs of America, which presents Money Matters), or personal finance websites. Tamara learned not only about saving and budgeting but also how to read a paycheck and how to pay back a loan.

10. Learn to deal with financial decisions face you everyday

Most of us may think of financial decisions in terms of big decisions such as when to buy a house and how to save for retirement. Tamara emphasized that many small decisions have financial consequences. For example, when it’s lunchtime, she needs to choose whether she will eat lunch in the cafeteria or go back to the dorm room to make a sandwich.

Tamara’s parents laid a foundation for financial education by opening a savings account on her behalf and encouraging her to spend wisely. But the financial literacy course provided specific information on topics not discussed elsewhere and gave her new insights. Experiencing success in trying the ideas (such as being able to save money by budgeting and finding alternatives to mall shopping) reinforced these lessons.

Have you taken financial literacy classes? If so, what did you learn, and how did they change your life?

This article is from Julie Rains of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The First Payday: Helping Your Teen Understand Money

Sarah Winfrey — Thu, 15 Jul 2010 13:00:05 +0000

Teens vary in their responses to getting a job. Some long for the freedom that having their own money promises. They want an increased cash flow for their clothing end entertainment budgets. Others are less than thrilled. These dread spending so much of their time doing what someone else wants them to do.

Whether your teen is excited or bored at the prospect of having a job this summer, YOU can respond to their newfound extracurricular activity by helping them learn not only what it takes to be a good employee, but how to make the most of the money they’ve earned.

Introduce Budgeting

The big, bad, “B” word doesn’t have to intimidate your teen. Sit down with him or her and help them work out a plan for the money they’re earning. Since even the most low-key kid has stuff he wants to buy, motivate him by asking how long it will take him to save up for what he wants. Remind him of any necessary expenses, like car insurance and gas, and encourage him to put away at least a little bit for the future.

Whether your child takes all of your suggestions or not, he’s hearing information that he may not have heard before. If he doesn’t apply it now, that doesn’t mean he won’t in the future.

Talk about Taxation

Many teens are surprised, and not in a good way, when they see how much the government takes out of each of their paychecks. There’s no better time to talk about where tax money goes and why she’s required to pay. If your teen is interested, talk about the different kinds of tax money taken out (look at the pay stub for the amounts).

If nothing else, you can remind your teen that she will probably get some money back the next year. Offer to work with her on her taxes at the end of the year to make sure she gets as much as she can. Then when tax time rolls around, make sure she sits down with you and understands the process.

Encourage Savings

You can’t make a teenager do anything, least of all save his money. But you can encourage it. Try helping your teen select a specific goal to save for, as t his will motivate him to actually put his money away.

If your teen is going to be paying for some or all of his college expenses himself, remind him of this. Let him know where you’re willing and able to help out, and help him figure out how much he’ll need to cover the rest. Seeing these numbers may help him save, once he realizes just how long he’ll have to work to get there.

Explain Credit

It’s never too early to explain credit to your teen. As soon as she’s 18, she’ll most likely have card offers coming to her, so it’s a good idea to make sure she already understands how it works. Make sure she knows that she’s still responsible to pay for everything she purchases, and explain how the concept of interest means she could end up spending even more than the listed price for an item.

If your teen is responsible and you’re comfortable, many credit cards will let you put her on your account. This will give her some “real world” experience with credit cards before she’s on her own.

Be There when They Fail

Most teens will make financial mistakes somewhere along the line. Even if all you’ve ever modeled and taught are good money habits, they’re likely to spend too much, overdraw an account, charge more than they have, or get in some other kind of financial trouble. While you don’t want to bail them out entirely, you also don’t want to condemn or criticize them. Everyone makes mistakes. For teenagers in particular, it’s how they learn.

Beyond all of these suggestions, encourage your teens to enjoy the money they earn. Remind them that, after the work of budgeting and saving, comes the pleasure of spending what is left. Enjoying their money is part of the process, too, and don’t let them forget it!

This article is from Sarah Winfrey of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Tips to Help Your Teenager Become Credit Smart

Lisa Cintron — Fri, 12 Feb 2010 15:00:07 +0000

What is the first thing a teenager is going to do with an extra few thousand dollars in their pocket? Spend it of course! (Without any regard to how it's going to be paid back or all of the fees associated with the loan.)

When I was a young adult in college, I remember the credit card companies pitching their tents on career day. They would lure us with gifts and enticing giveaways and promises of a bright future because we were proud owners of a shiny new credit card! After applying for every card I could get, I had 5 beautiful credit cards in my wallet that I would flash just to show how grown up I was, and before I knew it, I was several thousands of dollars in debt and didn't know how I was going to pay it off.

Every time I looked at my credit card bills, it appeared as if the balances were getting larger and larger. I couldn't keep up with the fees and finance charges! With the help of a financial advisor and a lot of tears, I was finally able to get out of debt and save my credit history, but it took time.

Now that I am a mother of two teenagers, credit card abuse is one of the first dangers of financial common sense that I discussed with them. If you do not have the money in your pocket or in your bank account, don't buy it! Use credit for the goal of building a solid credit history and do it with intent and purpose.

Fortunately, In May of 2009 the President Barak Obama signed into law the Credit Card Accountability, Responsibility and Disclosure Act of 2009, or CARD. It will take effect February 22, 2010 and will make it much harder for credit card companies to prey on teenagers and young adults by making it a requirement that the applicant have a job or co-signer

Credit card abuse is easy to fall into, however it is a bit of challenge to rent a place to live or make large purchases without a credit history. Having a non-existent credit history can be as much of a detriment as it is to have a bad one. But there is a way to build a good credit history without falling into the pitfalls of an out of control credit card debt. Here are my tips to help your teenager prepare for responsible credit card ownership.

Limit the credit card ownership to two general cards.
Use a debit card instead of a credit card. It is deducted from your bank account and helps avoid over-spending.
Have a job before you even think about getting a credit card. (This is in the new bill.)
Put a fraud alert on your credit report. This will not only protect your credit from fraudulent use, it will also reduce the credit card offers.
To avoid temptation of accepting new offers, Call 1-888-5-OPTOUT (567-8688) toll free to request that the credit reporting bureaus stop selling your name and address to lenders. This request is good for two years. You'll be asked for personal information, including your name, telephone number, and Social Security number.
Never sign up for a department store credit card. They catch you when you are the most vulnerable, right when you are reaching for your wallet and cursing yourself for spending more than you should have. The store clerk flashes her pearly whites and offers you a great deal: "would you like to save 15% off your entire purchase by applying for instant credit?" These predators offer the discount because they know they will make a hell of a lot more in fees and finance charges when you charge your purchase. Not to mention the finance charges are through the roof compared to a regular Visa or MasterCard. This article says it all!: Credit Reform and My New 703.8% Card
Don't carry a balance. Make a purchase once a month well below the credit card limit and pay the entire balance every month.
Make it a habit to pull your credit report from all 3 agencies every 6 months. You'll be able to catch any discrepancies from the credit reporting agencies and catch any identity theft.

Credit card debt is really a high interest loan in disguise. Here's a breakdown of some typical credit card fees:

Finance charge: This can be as high as 25 percent on the unpaid portion of your bill each month.
Annual fee: Some companies charge yearly membership fees of anywhere from $20 to $100. Just in case you are smart enough to avoid carrying a balance, they will make sure you pay something with the annual fee.
Cash advance fee: Interest/finance rates and fees are much higher for cash advances — avoid it at all costs.
Late payment fee: Paying late can also result in hiked interest rates.
Over the limit fee: Going even 1 cent over your approved credit limit can trigger an over limit fee of up to $25-$45 for every transaction over the limit. This one adds up very quickly.

Help your teenager understand the responsibilities of credit card ownership and pitfalls that come along with it. Making a wrong move with credit can literally dictate the lack financial power they will have in the future. My credit card woes prevented my ability to buy my first home with my husband, and it was one of my biggest regrets in life.

Additional Resources:
The Federal Trade Commission provides free information to consumers on dozens of topics related to credit and credit cards, ranging from "Choosing and Using Credit Cards" to "Avoiding Credit and Charge Card Fraud."

Guest Post Blurb:

This is a guest post by Lisa Cintron, Executive Vice President at AdvisorWorld.com, a social community of consumers and financial advisors who engage in conversation to help you research financial topics and potentially find the right financial advisor for your specific needs.

This article is from Lisa Cintron of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Help Your Teenager Earn Their First Million

Debbie Dragon — Fri, 13 Feb 2009 13:10:15 +0000

As adults, how many times have you wished you had invested money as a teenager or young(er) adult? We're all aware of the power of compounding interest, and the idea that starting your savings earlier means having more money when you are ready to retire, but by the time we discover this financial truth – we've already missed a whole lot of years of saving! Why not help your kids earn their first million?

Teenagers aren't thinking about retirement. They're thinking about getting their first cars, road trips with their friends and falling in love. If you can help your child realize the formula for retirement fund success relies on starting it early and not withdrawing the money until retirement, your child won't be among the adults who look back and wish they had started their retirement savings earlier. Investing money for retirement as a teenager doesn't have to be overly complicated. You don't have to spend hours studying the performance of various stocks and bonds or anything – just open a Roth IRA with a low-cost equity portfolio and leave the money until your 16 year old turns 67 and can remove the money tax-free.

Here's how today's teenager can (start) earning their first million by the time they retire:

Get a summer job at the age of 15 or 16: Can a 16 year old earn $2,000 over the summer months? Of course they can (and I did too, 13 years ago when minimum wage was even less than it is now). If your teenager gets a job at about $9 an hour, they would have to work around 223 hours to make a little over $2,000. This is before taxes are taken out though, so to be on the safe side, you could assume they need to work around 350 hours in order to clear the $2,000 after Uncle Sam gets his cut. A typical summer vacation is around 3 months in length, so your child would be looking at working at least 117 hours per month, or about 29 hours a week. This leaves plenty of time for socializing and “hanging out”, too.

Earn $2000 per summer all through high school: (and maybe your first summer as a college student or new high school graduate, too) If your 16 year old earns $2,000 during each of the four summer vacations of their high school career, they're looking at $8,000 that can be placed in a Roth IRA to earn tax-free for as long as the money remains in the account. (If you withdraw the money after you are 59 and a half years old, it can be withdrawn tax-free as well!) With $2000 invested into a Roth IRA over the teenagers four summer vacations, your sixteen year old could start the ball rolling to earn their first million for retirement. If you invested the $8,000 earned over the four summers into a Roth IRA; investing in common stocks with the average compound rate of 10.7%, your account would grow to be over $9,300 at the end of the fourth year. By the time your sweet sixteen year old has graduated from high school and started the next phase of his or her life, even without any additional contributions those summers of working will have earned:

Over $25,000 at the age of 30
Over $71,000 at the age of 40
Just shy of $198,000 at the age of 50
Over $540,000 at the age of 60
Over $1,100,000 at the age of 67

Helping your teenager understand the value of compounding interest and saving early will turn them into retired millionaires with just a few summers of working. (Not to mention whatever they do to contribute to their retirement accounts through their adult working years). As we get older and have more financial responsibilities, most of us find it impossible to save $2,000 in 3 months time. The opportunity is perfect for a teenager to establish their retirement accounts, as long as they keep their hands out of this piggy bank until they retire.

This article is from Debbie Dragon of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: