While we fervently hope young ones will succeed in life, we unfortunately can't rely on schools to teach them smart money management. Too many educational institutions ignore this vital topic.
The solution? Talk to kids about money. If they're your children, get them involved in family financial issues. And perhaps have them read our newest book, The Motley Fool Investment Guide for Teens: 8 Steps to Having More Money Than Your Parents Ever Dreamed Of. In a friendly and conversational way, the book offers advice on how teens can make, save, and invest money. (Hint: It could be a perfect holiday gift for a teen you know.) Here are a few excerpts.
From "Step One: Set Goals (and Reach Them)"
The incredible power of time
You're probably a fan of the power of compounding already, but we'll give it one more shot. Imagine two people of the same age. Let's call them Marge and Homer.
Marge begins investing at age 15. Via bake sales and newspaper routes and household chores for her parents, she manages to save and invest $1,000 in the stock market each year. She stops doing so at age 30, having invested a total of $15,000. After this, she never invests again. Never. Not for the rest of her life. On the money she's already invested, she gets the market's historical average return of 11%.
Homer, meanwhile, is a late bloomer. He doesn't get his financial wake-up call until he's 35. Unfortunately, that's not unusual. Beginning at age 35, Homer then scrapes together not $1,000, but $5,000each year and invests it. Let's hear it for Homer. He keeps at this, putting away $5,000 each year, until retiring at age 65. That amounts to a total of 30 years, and $150,000 invested. And Homer also gets the average rate of return of the stock market, 11% growth per year.
Homer has invested 10 times more than Marge. But he started 20 years later.
Who ends up winning this race?
Here are the numbers:
Marge Homer Begins investing at age 15 35 Stops adding money at age 30 65 Invests each year $1,000 $5,000 Invests a total of $15,000 $150,000 Total grows each year by 11% 11% Total worth at age 65 $1,473,172 $1,104,566
Hard to believe, ain't it?
The big lesson here is time. It's the critical advantage that you, as a teenager, have over every adult -- including the authors of this book. In fact, since we, the authors of this book, are in our thirties, we are like Homer to your Marge. Even if we invest $10 to match every dollar you invest, we won't be able to catch up with you in retirement. And were we your parents' age, somewhere from 45 to 55 years old, we'd literally have to invest $20 to $40 for your every one dollar just to stay even with you in retirement. For every $1,000 you put in, your parents would have to put $20,000 to $40,000 just to have as much for their retirement.
The lesson, brothers and sisters, is obvious, is it not? Start now, with a dollar or two here and there, week by week. One less coffee; one less pair of shoes; one less trip to the snack bar; one less CD. The little commitments of today will lead to enormous rewards throughout your life. $1,000 a year saved and invested in stocks from ages 15 to 30 should, based on historical record, generate just shy of $1.5 million in your retirement account.
From "Step Three: Be Smart About Your Money"
Be aware of how companies are trying to sell to you
One way to not overspend is to be a savvy consumer. This involves taking notice of how companies and advertisers are trying to manipulate you. Here are some examples:
- Supermarkets tend to put some items that most people want (such as milk and bread) in the back of the store or, at least, far apart from each other. That way, shoppers won't be able to rush in and out. They'll have to cover a lot of ground, encountering many products and perhaps buying some items they didn't plan to buy. It's been estimated by researchers that about 60% of supermarket purchases are not planned.
- Supermarkets and other stores often put tempting, low-priced items -- such as candy and magazines -- along the checkout line. They're hoping you'll buy something on impulse as you stand there waiting. A lot of candy gets sold because a parent is waiting in line with a child, who begs for the candy he's staring at. (Similarly, cereals that appeal to children will likely be on lower shelves, not higher ones.) They're targeting you, as teens, too. Guaranteed they've got an aisle of magazines or knicknacks and they've lined up as much Britney Spears and Josh Hartnett stuff at eye level.
- Look closely at ads in magazines and TV commercials. Notice how many times advertisers associate their products with something that appeals to people. For example, a sports car might be shown with an attractive woman. This is meant to get men subconsciously to associate that car with pretty women. The suggestion is that if they buy that car, they date that woman (uhh, it doesn't always work that way!). Notice how happy people seem to be in many cigarette ads. The advertisers want you to subconsciously associate smoking with having a great time (as utterly ridiculous as that is. In fact, if it doesn't seem ridiculous, visit some lung cancer patients at your local hospice. Not so fun.) Ads generally suggest that you'll earn more respect, more love, more success, and more happiness if you use their product.
- Watch out for "up-selling," too. Surely, you've noticed how fast-food cashiers ask you, "Want fries with that?" When customers don't order fries, they probably don't want them. But when asked if they want fries, many will say, "Uhh, yeah, OK." Ka-ching! An extra sale for the restaurant. Other restaurants will do similar things, asking if you want dessert. They're trying to influence your decisions. Electronics stores will try to up-sell you, too, recommending service warranties that usually aren't worth it.
Basically, think hard about what a company is doing as it sells its products or services. Most moves are very calculated, aiming to get your interest and make a sale.
From "Step Three: Be Smart About Your Money"
Car insurance can be the bane of the teenager's life. The folks who pay the highest insurance premiums are males under the age of 25 (sorry, guys). It may not seem fair, but it's based on the statistics -- as is pretty much all of insurance, actually. The insurance price you're quoted will depend on many factors, including:
- The insurance company
- Your gender, your age, how long you've been driving, whether you're a good student
- Your driving history (whether you've gotten any tickets or are a safe driver)
- The car (its type, age, mileage, etc.)
- Where you live (city, suburb, etc.)
- How many miles the car will be driven per year
- Safety factors (whether the car has certain features, such as airbags, and whether you've had any special training)
- Whether this insurance is being tacked onto your parents' policy or is a new policy
- Your credit rating (If you've not repaid loans on time, insurers may see you as an extra-risky person to insure.)
As you can see, many of these items are out of your control. You can't do much about your age or where you live. But you probably can control, at least to some degree, what kind of car you get, how good a student you are, whether you pay your bills, and whether you get any speeding tickets. Speeding tickets themselves can cost as much as $150. And they'll drive your insurance premiums 15% higher (which can mean a few hundred bucks more each year). In fact, our first cousin, Garrett Lowe, was hit with two speeding tickets on the day he got his driver's license! Gasp. Don't let that happen to you!
Consider this, too. According to the Mid-Atlantic Research Institute, the chance of death for someone who crashes at 70 mph or more is 100%. At 60 mph, it drops to 50%. Driving safely and within speed limits does save lives -- and big insurance bucks, too.
If you like what you read here, you'll find a lot more in our newly refurbished online area, Teens and Their Money . For even more information in a handy portable, electronics-free format, check out our book, The Motley Fool Investment Guide for Teens: 8 Steps to Having More Money Than Your Parents Ever Dreamed Of.
[By the way -- there are just a few days left in which your teen could enter our contest and win $1,000 -- check it out!]