5 tips for talking with teenagers about money

[December 23, 2008]  (AP)  Parents can help teens learn about handling money by going over some simple ideas. These five tips come from the National Endowment for Financial Education, an Englewood, Colo.-based group with a program geared toward teenagers.

1. Understand the difference between needs and wants.

Many kids may consider movies and designer jeans needs, but they need to understand that needs are the true essentials -- such as food, clothing and shelter. Wants can make life easier, but kids need to learn that they must address and pay for their needs before they can spend money on their wants.

2. Set financial goals and budget accordingly.

One of the best ways for young people to learn about managing money is for them to set and achieve a simple financial goal. Younger teens can benefit from opening a savings account and choosing something to save for -- an item of clothing or a piece of sports equipment, for example.

Help the teenager figure out how much to save each week to reach the goal within a reasonable amount of time. It's a good lesson in prioritizing and an introduction to the idea of planning for longer-term goals.

3. Know your money personality.

We all emphasize different things in the way we manage money. Some people are primarily spenders while others are savers. It is important to identify what kind of money personality your teen has, so that you can encourage him or her to plan accordingly and avoid blunders.

For example, people who are likely to immediately spend their loose cash may want to make sure it's not quite so readily available. Instead, they should be prepared to deposit it directly into a savings account. It is important to be aware of children's financial weaknesses and recognize that that their money personalities play an important role in shaping their financial future.

4. Pay yourself first.

Whether teens have a job or earn an allowance for work at home, they should get into the habit of putting a percentage of earnings directly into savings. By making the contribution automatic, it becomes like paying a bill. Suggest that they start with 10 percent, and encourage them to think of the practice not as a sacrifice, but as an investment in their own future.

5. Start saving early.

Starting to save early is more important than saving a large amount. Explain how compound interest works, using examples that teens can relate to.

For instance, the Rule of 72, which is a simple formula for calculating how long it takes money to double at any given time, is an easy way to show your teen how important it is to save from an early age.

Under this rule, the number of years required to double an investment is equal to 72 divided by the interest rate earned.

Let's say your bank offers 4 percent interest on a money-market account. Since 72 divided by four equals 18, your money will double in 18 years. Such examples to show your teen how much can be earned by simply putting away a few dollars a week. Soon he or she will get into a healthy habit of saving.

For more information try NEFE Teen Resource Bureau: http://www.ntrbonline.org/

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Source (PDF): http://www.smartaboutmoney.org/

[Associated Press]

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