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For teens, learning how to budget and be responsible with money probably doesn’t rank high on the priority list on their journey to adulthood. But it definitely should be a goal, experts say.
Financial guru Dave Ramsay, in his blog post, “How Teens Can Become Millionaires,” preaches the value of compound interest and how opening a long-term investment account as soon as possible will work magic years down the line.
He uses the example of two friends, Ben and Arthur.
At age 19, Ben decided to invest $2,000 every year for eight years. He picked investment funds that averaged a 12 percent return. Then, at age 26, Ben stopped putting money into his investments after socking away $16,000.
Arthur didn’t start investing until age 27. Like Ben, he put $2,000 into his investment funds every year until he turned 65. He got the same 12 percent return as Ben, but he invested for 31 more years than Ben did and put away a total of $78,000.
Surprisingly, though, by age 65, Ben had $700,000 more in savings than Arthur.
The key, Ramsay writes, is Ben started investing eight years earlier, turning his $16,000 into nearly $2.3 million. Since Ben invested earlier, the interest kicked in sooner.
“Waiting just means you make less money in the end,” Ramsay writes.
That’s great advice, as is teaching your teen other strategies, such as several outlined by Melissa Koop, a vice president in retail at MidWestOne Bank, in an online article.
Koop’s tips include:
• Limit them to spending “their” income. Don’t give your teen too much extra money beyond what they earn, or they won’t understand they have to limit their spending.
• Help them budget. Random spending is a bad approach. Budgeting will allow your teen to set short- and long-term financial goals.
• Recommend they save when shopping. Clip coupons. Wait for items to go on sale. You get the picture.
Richard Watts, author of “Entitlemania: How Not to Spoil Your Kids, and What to Do if You Have,” an Orange County-based personal adviser and legal counsel to the super wealthy, notes that by nature, children (and adults) take the path of least resistance.
“If you make it easy for them, they’re going to take the easy route,” Watts said.
“So if you’re going to write the checks for them, if you’re going to pay all their bills, they will accept all of your money, just like goldfish will eat all day until literally they’re dead, because they don’t know any better.”
So, Watts advises, stop feeding the goldfish — or limit what you feed them — if you want your kids to learn how to be responsible with their money.
“We really have to look to things to create for our kids that will help them embrace the tension of life,” Watts said. “Teaching your teen how to fill out a deposit slip or write a check, while important, is just pretending (to make them savvy with money).”
For parents to really teach their kids how to be responsible with money, they have to learn to say no, Watts said.
“Parents need to teach their teens to embrace struggle and tension, and that can begin with little things like not buying the latest model of a cellphone for them.”
Watts says although he, too, has had to rethink his parenting skills along the way, he has successfully raised his children by displaying tough love when it comes to finances.
“I’ve always told my kids, ‘You can have anything you want, but here’s what I’m willing to give you.’ People learn through struggle to manage their money successfully. And that lesson has to start as early as age 9. It’s too late if you wait until your children are ready to go to college.”