Young, smart and rich
by Kate BavelockSuddenly, they’re leaving home. It’s tough enough to face an empty nest. But imagine life from your children’s perspectives.
For a lifetime, they’d open the refrigerator and the food was there. When they were bored, they could surf the cable or get mom to drive to Blockbusters. New clothes? No problem. Now, they are on their own. And for those in college, chances are they’re facing growing student loans and the prospect of paying them back well into their 20s.
Many teens first face financial realities when they are ready to drive – helping parents pay for gasoline, insurance and auto repairs. But financial advisers are voicing concerns that young people are not preparing themselves for the tough work of managing their adult finances.
The education gap may not be new, but the financial challenges today overwhelm those of previous generations. A recent study by the Bank of America reports that more than half of all college students will accrue more than $10,000 in student loans. Six out of 10 haven’t created a budget and a third of college juniors are considering taking time off from their studies because of mounting financial pressures.
Many college students sign up for credit cards without knowing how to use them. They don’t have a firm grasp of minimum payments, late charges and the long-term consequences associated with a poor credit rating, such as when it comes time to finance a car or purchase a home.
On the flip side, young people today have access to more information than ever before. Those who can stay on the financial straight and narrow can create a bright financial future.
Nick Vantine, CPA, PFS, of Boardwalk Advisors in Sandwich, offers five strategies for young people:
1. Credit cards: Just say no. No student should use credit cards, period. Instead, use a debit card. “Seeing money disappear from your checking account is great training to see the pain caused by spending,” said Vantine. For the first couple of years, teens and their parents should reconcile the account together. It is easy and dengerous to use credit cards and lapse into making only the minimum payment thinking you’ll deal with the problem later.
2. Have a ‘saving mentality.’ Set aside money every paycheck. “Young people have a huge advantage if they start early,” said Vantine. Know that saving is more important than a new car or a vacation, no matter what our current culture tells you.
3. Invest for a goal. Set a reasonable target, like a car or getting an apartment, to work toward. “My kids know that I have been saving for their college. But it is still my money to use at my discretion, so they also save on their own,” said Vantine.
4. Think long term and start now. Even teenagers and those in their 20s should save for retirement. “The power of compounding is your friend,” said Vantine. “If you start early, there is less stress in life.”
5. Don’t go it alone. Find a mentor, said Vantine. Financial skills are often not taught in the school system. A parent, uncle, trusted adult or the family financial adviser can give great help and encouragement. Don’t think moving into independent adulthood means you have to know everything and make decisions on your own. The smartest students are those who ask questions.
Vantine recommends that older teens read financial books. He recommends “Rich Dad, Poor Dad’ by Robert Kiyosaki, “The Millionaire Next Door” by Thomas Stanley and William Danko and “The Future for Investors,” by Jeremy Siegel.
Raising a saver
Brendan O’Keefe, a financial planner in Orleans, offers the following tips to teach young people how to save early and save often.
Modeling. Parents who differentiate between their needs and their wants, pay as they go, and save are the best teachers and role models. It’s awfully hard to preach one thing when you practice another.
Saving is for all ages. “Give kids the same satisfaction you have when you put money into a 401(k) and see it matched and grow,” said O’Keefe. Set up your own mock 401(k) with them where you match whatever they save. “What a great incentive. If they are able to save $25 of their allowance and see it turn into $50, it really gives them motivation.”
Proactive budgeting. After college, help them create a budget with their monthly income (minus taxes) and monthly expenses. Evaluate which expenses are discretionary. Include in the list of expenses a “me” expense, which is investing for retirement, and write that check to yourself. Understand that the younger you start, the faster it will grow.
Web sites to support the effort:
www.ItAllAddsUp.org – online games and simulations to learn credit card management, budgeting, saving and investing
www.makingitcount.com – advice for students by Monster.com
www.edwise.org – college budget calculators, post-college budget calculators, best strategies for paying off student loans.
www.youngmoney.com – everything from bargain airfares to weighing whether to invest or pay off student loans with extra cash
www.practicalmoneyskills.com – all the basics for educators, parents and students
www.ftc.gov/bcp/conline/pubs/young/readycrdt.pdf – straight talk about credit card traps
Originally published in the Sept/Oct 2006 issue of Cape Business.
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