Helping A Teenager Take The First Steps Towards Financial Freedom

Yesterday, I had a very long IM conversation with a young cousin of mine who is in high school and has a pretty lucrative lawn care business going on right now. Most of my younger cadre of cousins and nieces and nephews look to me for advice on a lot of things that they would never ask their parents – I’m somehow identified as the oldest member of their generation in their eyes, and thus I “get it.”

Anyway, he wanted to know how he should handle the money since it was more than he had ever had before by far. He had also overheard me talking to others about investing – and he knew he should be making more than the 1% interest that he would make at the local bank.

Here’s all the advice I gave him – and knowing him, he’ll probably follow almost all of it to the letter. Feel free to chip in with any additional advice; I’ll send it along to him and also give this URL to similar-aged people who ask such questions.

Ask yourself “What do you want to do with this money?” It’s fine to have a lot of answers. Perhaps you want to save for a car or save for college. Maybe you want to go out and buy a Nintendo Wii. Possibly you’re thinking long-term already and are looking at a house down payment after your schooling is done. One other possibility that is probably way out of your consideration right now is retirement, but if you put even a little bit away for that right now, it will be an enormous amount by the time you retire (fifty years of compound interest, even on a little bit of money, can be enormous). It’s fine if you don’t want some of these things, or any of them.

Pick at least one relatively short term goal (two years or less) and at least one relatively long term goal (more than two years) In my cousin’s case, he wanted a car in the short term (he’s fourteen) and to save for a house down payment in the long term (he’s going to go to trade school and become an electrician). Those both seemed like incredibly sensible choices to me given his age, and I told him so.

Split your money into five piles. The first pile should be the taxes pile. I told him to call his parents’ tax preparer, tell the preparer how much he would make from mowing, and ask whether he would pay any taxes on that amount. I don’t believe he’ll owe any at all, but it’s a good value to instill in someone who doesn’t know anything at all about taxes yet.

The other four piles should divide up what remains. I would make a “pocket money” pile, so you can go out to the movies and other stuff with friends. I’d make a “business” pile, which would be used to repay any money you borrowed to buy equipment or gas – and also to buy more equipment or gas as needed. I’d also make a “short term goals” pile and a “long term goals” pile.

How should these piles be divided? It depends heavily on the business (some businesses will gobble more money than others) – make sure you have plenty of money to cover business expenses. Pay that first, then take the majority of what’s left and split that evenly between the long term and short term goals. The remainder is your pocket money. I used an example of $100 in income over a week for him: you might have to put $5 of that into taxes, leaving $95. You might also need $10 worth of gas and might need some more equipment in the future, so I’d put $20 in the equipment pile, leaving $75. I’d put the majority of that ($40) into savings, with $20 each into long term and short term savings, and then the other $15 I would spend as pocket money. I told him that if he does this all summer and again the following summer, he’ll be in excellent shape to get a used car after he turns sixteen and he’ll be in excellent shape for buying his own house when that comes around, too.

Where should the money be saved? I encouraged him to get a couple of online savings accounts linked to his account at his local bank (offering to help him if he had any questions). One should be for the short term savings and one for the long term savings. That way, he can’t be tempted to just stroll down to the bank branch, take out a bunch of money, and go buy something ridiculous, plus the interest benefits on many online savings accounts (I recommended ING Direct and HSBC Direct) are as high as 5%. If he puts in $20 a week each week this summer (for 13 weeks), he’d earn about $10 more just by having it sit in the online account for a year rather than at the local bank, and that’s not even including sign-up bonuses and the interest on the fairly nice balance he already has at that bank.

What about investing in stocks or real estate? Investing can wait. It’s quite possible that he may decide to use that down payment money to help buy a car in two years, and that’s the only chunk of money that I would even consider having him use for investments.

What about a Roth IRA or something? Again, that can wait. If his parents were doing investing for him, I might recommend it, but this young man is building up a solid income at the age of fourteen – the fact that he’s doing any financial planning now at all puts him way ahead of the game. Let him learn his lessons about the challenge of saving and investing this way so that his choices don’t have serious tax consequences.

In short, the real lessons that you can give to a teenager are the idea that you should put some of your money away for the long term and that some places are better than others to put your money. Drowning them in options and other issues will only tell them the same thing that their parents might have learned, that personal finance is scary when it really isn’t. If they’re interested, keep going with more suggestions, but focus on the core ideas of putting away some of your money for the long term. If they really get that piece, they’re already light years ahead of their peers.

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  1. Jason says:

    If the stock market were to average an 8% return over the next 45 years, every dollar the kid were to put into a Roth IRA today would be worth $32 at retirement.

    Not that I’m necessarily saying he absolutely should open a Roth, but that bit of math should probably be part of the decision process.

  2. Prasanth says:

    And ask him to read Simpledollar regularly ;) Actually, that is solid advice that you gave out for a fourteen year old. How I wish I had a cousin like you when i was that young !!

  3. Amy says:

    A CD is also a good choice when you’re a teenager. It’s available at your local bank, and helps support delayed gratification.

    Another useful tip for teenagers – whenever you get unexpected money (gifts, odd jobs, etc.), save half.

    My mother also set up an incentive program for me, where she matched everything I deposited into my “college savings” account. The deposits were never big or regular, so this was pretty painless for her, but I did this all through my childhood, and I was shocked when I was eighteen to discover I had several thousand dollars saved up. It was enough that I didn’t need to get a part-time job my first year of college.

  4. Ted Valentine says:

    close tag

    Good advice.

  5. That was all great advice for a 14 year old! I hope my kids have that mindset when they are 14.

    When I was 12-18, I took all my money and put it in CDs that would mature when I needed the money. When I got out of college, I had about 10 CDs mature within 6 months and the money was used for a $20k down payment on our house.

    One of those CDs represented my first $1000. I saved it when I was 10 and opened a whopping 14 year CD. To this day, saving that money is the one financial move I am most proud of. Of couse, that was back in the days you could get 7%+ on a CD

  6. David says:

    Great article – a very useful bit of information and *practical* for someone at that age. I can’t even picture saving for a house at 14!

  7. Kimberly says:

    Sounds like good advice. I hope to do something similar this summer and upcoming year–I’m graduating and entering college and will have my first regular part time job, with its first regular paycheck.

  8. Rachel says:

    Great advice, but you forgot tithing. The first 10% always goes to God!

  9. My wife’s uncle recently (5 years ago) filed for bankruptcy. His family is in financial shambles. I’ve been recently speaking to his teenager son about jobs and encouraging him to open up a Roth IRA for retirement. I think some of my encourage is getting through, but that’s caused some tension in with the father.

    I really want the teenager to do well, but I’m not sure how to “teach” him some life lessons while not sidestepping or stepping on his parent’s toes. The parents will not take advice from me, because they’re older and will not accept advice from a younger person.

  10. He should ABSOLUTELY open a Roth IRA! He will literally earn add’l tens of thousands of dollars on even a small contribution! And a 14 year old should certainly be able to accomplish this, since he has no overhead.
    This presumes, of course, that he is reporting his income to Uncle Sam. We talked our 19-year-old into this. She thought we were crazy, but when she saw the tables of the 60-to-1 return on her investment, she went for it. I haven’t worked out the numbers for the extra 5 years this kid’s money will be invested, but I’m sure it’s eyepopping.
    http://moneychangesthings.blogspot.com/2007/03/road-to-retirement.html

  11. I think that it is good advice as well. I have a daughter who when turned eight, had about $350 in savings. I told her she was old enough to put it in the bank to start earning money with it and she told me that she would rather own a money machine, like I own (I own several Laundromats). Obviously she didn’t have enough money to buy a Laundromat or even one of the washing machines, so to make a long story short, she wound up buying a vending machine and put it in one of our coin laundries. She Nets about $60 a month and works only 4 hours a month running her vending business. She is now 11 and still actively running her business but now her younger brother (who just turned eight) wants in on his on vending business so he just got finished putting a machine in another one of our stores.

    Each month the kids fill out a P & L and a balance sheet before I let them have their share of the profits. The lessons about money are tremendous and this kids love being their own boss. If you are interested in reading the entire story of my daughter Brooke and her vending machine business, check out the article I wrote about it at http://www.LaundromatInsider.org

  12. Let me echo Brian’s comments about teaching kids the value and benefit having your kids run a mini-business inside your own business. A relative of mine had a vendor business and the kids were involved with running part of it and believe me, they very quickly understood: ROI, ROT(time), sales, marketing, location, and P&L.

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