By BARBARA ESTEVES-MOORE

Just like saving for retirement, when it comes to teaching your teen about personal finances, starting early is better.

“You don’t want to force this upon your child because that may make them resent learning how to balance their finances,” said Jacob Culton, financial advisor with Northwestern Mutual in Cool Springs. “That said, you still do need to stress the importance of it.”

Culton said parents should aim to help their teens understand how important it is to manage your personal finances well and how vital things like investments, budgets and savings are to achieve what they want to in the future.

I learned personal finance by trial and a lot of error – errors that cost me credit rating points and years of debt. My parents, like many in their generation, kept their financial lives private and did not discuss it with their children. Because I learned the hard way, I wanted to do things differently. Culton said parents can begin by simply discussing the subject. And, he emphasized, don’t wait until they are teens. Start young.

“You should start with concepts of finances at a very young age,” he explained. “So, this doesn’t mean that you have to use actual money, but you can use the idea of budgeting and earning at a young age. This can be done as young as two or three by having a reward system for them when they are a good listener, or they pick up their toys or something of that nature.  This way they start learning the concept of ‘you reap what you sow.’”

He suggested using visual charts, a chalk board/dry erase board or maybe magnets on a refrigerator that will show them how to track progress towards getting a new toy or treat. This gives a young child a visual aid to help them understand where they are in terms of earning their toy “and therefore they’re getting the concept of savings towards a goal,” he said.

“The key is showing them the concept of how to save to accomplish something. Then over time you’ll be able to start introducing more complexities to them as far as finances are concerned.”

With my daughter, we started by sharing with her how much things that she wanted cost and how long it might take to save for that item. When she was older looking for bigger-ticket items, we would give her a budget of what she could spend and then she would shop within that budgeted amount.

“A teenager needs to know the base concepts of finances,” Culton said. “They need to understand that they have to save money in order to purchase something.  They need to understand the work that it takes to save money in order to purchase something.  They also need to understand the heartbreak of what it’s like to lose money after taking quite a bit of time to save it.”

He said teens should have a checking account and savings account and be taught how to balance their checkbook and use online services.

“I think it’s a great idea for them to have some experience with the market, meaning the stock market,” he said. “This could be a simple idea of just having them choose a stock, usually it’s a good idea to have them choose a company that makes something they like. For instance, maybe they have an item that they love or a food they eat a lot, whatever the case maybe they choose that company as their stock.”

Culton said teens can then “pretend” to invest in that stock and watch how it performs, either growing their investment or costing them money.

“Open a E*Trade account that you guys could work together on and talk about, the child can pick what investment options they want, and let them get familiar with what investing is like and the ups and downs of it, and this will bring more conversation for you,” he said.

My daughter is taking an economics and personal finance class this semester in school. She said her favorite part of the class has been learning about how to invest your money. I figured as much when she came downstairs recently and announced that she wanted to take her savings and put it into a mutual fund.

She told me she liked the idea of continuing to contribute to something like a mutual fund and watching it grow. She also said it has been helpful to learn about debt and how to manage money. While we had tried to talk about things like budgeting and how much things cost, we had not really taught her about finance or economics. She said the class has taught her about investments, the importance of insurance and specific techniques for budgeting.

“I think it’s also important for teenagers to start understanding what it takes to pay bills,” Culton said, adding that he would encourage parents to begin to have teens pay for certain items such as their own toiletries or evening paying some “rent.”

“These are concepts that they need to understand, and they’re quite simply examples of what it’s like to have to live on their own and keep a budget,” he said, adding that parents can keep the rent money from their children to save for something the teens want, whether it be a car, expensive clothing, etc. “This way it’s showing the power of saving for them yet again, and what it can accomplish over time.”

Culton even goes so far as to suggest taking taxes out on allowance to show teens that everything they earn does not go directly into their pockets.

“For instance, if you wanted your child to have a $10 allowance every week you could tell them that you’re giving them a $12 allowance, but they have to pay a 20% tax on that. It’s not exactly 20% but it gives them an idea and it makes them give you $2 every single week. I would hand them the money in cash and make them give $2 directly back over to you, so that they feel something in their hands and then give it back away.”

If you’d rather collect monthly or quarterly taxes from your teen, Culton said that gives them yet another lesson on savings. Instead of making them immediately give you back $2 of the $12 allowance, ask them to give you $8 at the end of the month.

“To build on that as well, if they’re unable to pay those taxes, then you could build in some sort of a penalty and interest that they will then have to pay on top of it to teach them the consequences of not paying on time,” he said.

This all sounds kind of extreme but I know I would have benefited from such lessons as a teen. Instead, I went off the college without a clue about finances. I didn’t know how much college was costing me nor did I understand the kind of debt I was mounting.

“I think the key for all of this is communication (about finances). It is about being present in their lives, and being present in their thought process when it comes to finances,” he said. “Having discussions with them is how you learn how they think about money and then you’ll start to get an idea of what they grasp, what they need further education on.”

“Every teenager is going to be different, and so the real key is in how you communicate it to them in a way that they are able to understand and apply it to real life.”

If you’d like to reach Jacob Culton to talk about investing with your teen, contact him at jacob.culton@nm.com

finances

Barbara Esteves-Moore, writer, editor and business owner

Barbara Esteves-Moore is a journalist, editor and the owner of Two Roads Communications and an editor for Home Page Media. She has been married for 20 years and is the mother of an active, opinionated and very lively 16-year-old. You can reach her at bem@tworoadscommunications.com.