Teaching Teens About Money - Finance for Teens

Let's face it - you've got enough to handle with your teenager. The last thing you want to spend time on is money - especially when you may not be a shining example of personal financial responsibility.

But the truth of the matter is this: the habits that your child develops now will greatly impact their future quality of life. For this reason, it's important to educate teens (and even pre-teens) on the aspects of personal finance. I've included topics below to give you some basis to work with. You may not use all of the ideas, but it is important that you do something to combat the financial illiteracy that is seen in many of today's adults (who were, at one time, in the same position as these teens).

Budgeting

I know it sounds scary, even to adults, but it's imperative that we all understand where our money is coming from, as well as where it is being spent. One of the most eye-opening experiences one can have is to see an analysis of their spending habits. A daily stop at Starbucks or a few too many iTunes downloads can quickly add up, yet feel insignificant with each small purchase.
I recommend that parents introduce their children to a site called mint.com. No, I'm not affiliated in any way with the site (other than being a satisfied user for years). This site, as described in a previous post, is an awesome way for teens to keep track of their income and expenses. Every time you log in, the website will actually pull data from your different banks, credit cards, investments, etc. and give you a snapshot of your total financial picture, including your monthly budget. Teens, being more tech savvy than their parents, will find it a real-world way to keep track of finances (in a way that they are familiar with - through technology) The catch is that you can't enter manual cash transactions, which brings me to my next point.


Banking

Many teens have a savings account, but it's really only used for that gift that Grandma put in there back in kindergarten, which has been long forgotten. What kids need, however, is a supervised experience with the banking system. I recommend that teens have their own checking account and debit card (with a parent listed as the co-account holder so that parental monitoring can be done). This gives the teen a chance to experience the use of cards and checks before the consequences become dire for overextending themselves. It teaches them that the check or debit transaction must have the money in the bank to back up the transaction, or there will be problems.

Many parents worry that teens with a card will go on a crazy spending spree - and maybe they will! But the damage will be limited to a relatively small amount of fees, etc. and will save them from racking up huge credit card debts later in life. It also familiarizes them with the banking system and the beneficial products that are available later on in life. In addition, it can help build a relationship with a bank that can provide financing at some point in their adult lives.

Allowances

I'm an advocate for allowing children/teens to make their own decisions with their money - and to live with their decisions. One way to do this is to provide an allowance for your teen. This allowance, however, should never be a right - it must be earned. It may be as simple as mowing the lawn, taking out the trash, or watching a younger sibling for an evening. This way, the correlation between income and work is developed. As we as adults know, money is rarely just given to you - it must be earned.

Once the teen has been given the money, you can encourage them to do certain things with the money, but it should end up being their decision in the end (again, so that they can live with the rewards or consequences of those decisions). If they choose to buy something spur of the moment and then have buyer's remorse, it will teach them to more carefully consider their purchases. On the other hand, if there is something more valuable that will require planning and patience to save enough money to obtain, it can teach the benefits of perseverance in a world filled with instant gratification. Clearly, these lessons cannot apply when a parent continues to provide money outside of the allowance for things that should be covered by the allowance (and, necessarily, what is then the teen's responsibility should be discussed ahead of time). If you continue to give them money for a movie ticket or a candy bar after they've already spent their allowance, you're not helping them. Instead, remain firm. You may even ask them if they'd like to look at their budget and spending to determine where they might have made different choices. Which brings me to my next point.

Saving

I believe that the number one thing you can teach your child or teen about money is to save. As we've seen, economic conditions can change rapidly. Nearly 10% of the population is looking for work but unable to find any (and many more are under-employed). The lesson of saving, even a small part, of your income is critical to both handling emergencies and being able to be successful later on in life.

One way you might do this is to develop a plan with your teen as to what percent they are willing to save (they might want to spend all of it - this conversation will go over better if you can point to specific examples of how saving has been positive for you - maybe it covered your expenses between jobs or allowed you to purchase that boat or dining room set after a significant period of setting aside money). On a side note, I also encourage tithing. From my Christian perspective, this basically asks that you contribute 10% of your income to the church. Doing this from a young age instills this trait while the habits are being formed and will result in a charitable adult. Even if you're not a religious person or family, it would still be helpful in the development of your teen to encourage some sort of charitable giving - you can encourage them to pick out a favorite charity and make regular contributions. On top of this amount, a portion should also be saved for future use (large ticket items, college, etc.). If you can get another 10% out of the deal, it would be an amazing life habit for teens to take with them into adulthood.

So what would this look like? Say your teen receives $20 per week (amounts will vary drastically based on how much they are doing to earn it and what they are expected to pay for with this amount).

Each week, $2 would go to charity, while another $2 would be placed into savings. They would be left with $16 each week that could be spent based upon their budgeted categories (clothing, entertainment, gasoline, etc). The key is, however, to give them the full $20 and then encourage them to set-aside the charitable and savings categories. That way, they are the ones doing it - not you.

These are some of the most important things that I believe teens should learn about personal finance. Believe me, there are more (interest rates, car payments, debt, investing, building credit, etc. - I'll try to touch on these in other posts). But these simple areas should give teens a base to work off of that can propel them into financial security and responsibility as they become the next generation of adults.

Should I Buy Gold and Silver?

Gold and silver have long held man's interest captive. Long used as currency to facilitate the exchange of goods and services, the luster and mystique of these metals have also increased due to their recent popularity as an investment option.

Maybe you've heard the radio commercials or seen the advertisements in the paper. Why all the fuss? Check out the charts below for the previous decade's pricing history for gold and silver from kitco.com. You'll see why it's garnering some attention.


Compare that to the Dow Jones Industrial Average for the past decade.
Now as you should know by now, past performance does not guarantee future results - although the Dow was basically flat over the past decade, a lot of people lost a lot of money by trying to time the market. In reality, they sold their equities after they had already fallen and most likely were to nervous to get back into the market until the growth was too far along - the end result being a net loss.

That being said, it's hard to convince someone not to chase returns like those that gold and silver have seen. However, those that chase returns will always get burned in the end. While some analysts see continued growth, others argue that we are seeing a bubble that will soon pop and drive prices back down to more normal historical levels.

Don't get me wrong - gold and silver do have their benefits:

Hedge Against Inflation - historically, the price of commodities has risen as inflation has also increased. Will the United States and other countries be forced to print money to solve their deficits? If we see inflation, this aspect of your portfolio may hold up well.

Recognized Worldwide - all over the globe, precious metals (especially gold and silver) are both recognized for their beauty and monetary value. Assuming you hold the actual physical gold and silver, you can take it to any place on the globe and trade it for goods and services.

Multiple Forms / Investment Methods - while some prefer to hold the actual, physical gold and silver (in bars, coins, bullion, etc), others purchase the assets and have them held in vaults by investment custodians. Others choose to invest in precious metals mutual or exchange traded funds. Still others invest in the companies that mine the precious metals (although this does not give you any control over actual precious metals, only the company that is doing the mining).

So what is the Everyman to do?

As we've discussed before, asset allocation is key. You've been drilled with the age old adage of not putting all your eggs in one basket - the same holds true here as well. What does this mean? Gold, silver, and other precious metals can and should be a part of your investment strategy - but only that - a PART of your strategy.

How much? Many sources cite a number around 10% of your portfolio, which seems like a reasonable number. The benefits of the diversification will be felt at this number, but it's not too much as to overbear the portfolio if there is a drastic downturn in the precious metals sector.

Where to Buy Precious Metals

In today's world, some of the best prices for buying precious metals can be found online. While I'm not recommending any particular site, I've listed a few of the more popular sites below.
American Precious Metals Exchange
Bullion Direct
Kitco

You may also be able to find precious metals dealers in your area - some stores specialize in buying and selling gold and silver. Still others may find success with pawn shops. You may even try eBay or craigslist (at your own risk - if you go this route, only meet in a public place - if I were doing this, I'd recommend meeting in a bank lobby - it's public and relatively safe).

As was mentioned before, some prefer to buy the exposure to the assets without actually holding them in their possession. A good way to do this is through the purchase of ETFs, such as GLD or SLV. These are purchased exactly the same way you would a stock - you can use the same channels (your financial advisor or online broker).

However you obtain your exposure to precious metals, it is worth having in your portfolio. Sure, it would have been nice to have purchased them a decade ago to be able to partake in the massive returns that they have seen. But they still have their benefits (as listed above) and should be a part of any investment portfolio.

Having Trouble Keep Track of Finances? Try Mint.com

A few years back, someone pointed me in the direction of Mint.com. While it was an interesting approach to managing my finances, it lacked the oomph that it needed to take over for my preferred weapon of choice (Microsoft Money). Water passed under the bridge and soon Mint.com became a small figment of suppressed memory.

Enter: a random Facebook friend a few months ago that recommended I check out Mint.com. Unbeknownst to him, I had once led on a short affair with Mint, but had since gone back to my first love. Out of curiosity, however, I thought I'd give Mint another look. That re-visit changed the way (and cost) of managing my finances.

What is Mint.com? Mint.com is an online personal finance software system that allows you to track all of your monetary transactions, as well as market values for other assets you may own (such as homes, cars, etc.). This information is automatically fed from your financial institutions, which populates various categories of spending and income in order to quickly and simply populate your budget, which allows you the ability to monitor your spending with a simple login, logout approach. Additionally, they point out areas in which you may be able to save money (for example, by opening an account with a bank with a higher savings rate or a credit card with a company offering better terms).

Mint.com has been around since 2005. With over 1 million accounts, they've seen a nice pace of growth over their history. But only recently have they become a viable option for serious financial management. Why?

1. Coverage of Financial Institutions

If you're a typical Everyman, you've got a checking account at a bank that's accessible to you at home and/or work, a savings account with a bank from your childhood days, a mortgage with another institution, a house, a retirement plan, some student loans with a few different lenders, and an auto loan (which I don't recommend, but that's for another post).

In my case, I have various accounts with Wells Fargo, ING Direct, ShoreBank, Smarty Pig (West Bank), PayPal, Citi, US Bank, Affiliated Computer Services and Firstmark Services (student loan processors), Prosper (p2p lending), Zecco, and a retirement plan - ALL of which automatically feed every transaction directly into Mint.com. One of the problems I had during my first run-a-round with Mint was that it didn't cover many of the institutions that I use. That problem = gone.

2. Ease of Use

By simply logging into the system, the update process will begin pinging your financial institutions for new transaction information. This will fall into your various budget categories and show you (in multiple formats, such as charts and graphs) where you're spending your money.

3. It Keeps You Informed

One of the neat features that Mint.com offers is the ability to receive alerts. For example, you can set the program to notify you when one of many outcomes occur (such as overspending in a category, transactions above certain dollar amounts, etc.). I've set it to email me when such an event occurs (mostly because it's a way to also monitor any fraudulent activity that could be occurring in my accounts - if it says I spent $2500 on tickets for me and a dozen of my close friends to a Hannah Montana concert, for example)

4. It's Free

Probably the best feature - it's free! No more having to fork over money to Microsoft for a program that does essentially the same thing!

And draw backs?

With their growth, it doesn't appear they've been able to keep up with customer service requests. However, this seems to be improving with the advent of community forums that allow users to post issues that they are having. For the most part, they appear to have become more willing and able to help deal with issues that arise.

Conclusion:

Mint.com is worth the time it takes to set up (basically, if you know your login information for the various financial institutions, you're all set). With its ability to show you your financial position and trends in an easy to read and navigate manner, I'd recommend it to all Everyman's Money readers.

Have something to add? Disagree? Hit up the comment section below!

Best Tax Moves in 2010

Yahoo! Finance has an interesting feature article on taxes for 2010. While it may seem odd to think about 2010 when you are just gathering together your W2's, receipts, and all sorts of other documents for 2009, it's always best for Everyman to be proactive.

Some of the best on the list:

- Buy a Home

Not only can first-time homebuyers grab an $8,000 tax credit, but now current homeowners who have lived in their residence for 5 of the last 8 years can also qualify for a $6,500 tax credit. And remember, a credit comes straight off of the amount of taxes you pay, not off of the income that is eligible for taxation (thus, a credit is better than a deduction).

- Convert to a Roth IRA

If you think like I do, taxes will go no where but up from here. So why not pay the taxes now and avoid a higher tax bill later? That's what a Roth IRA can do for you. A traditional IRA allows you to contribute tax-free, but requires that you pay taxes upon withdrawal. A Roth does the opposite, allowing you to prepay your tax, but enjoy the ability to withdraw the money tax-free. Like I said before, I expect to be paying a higher share of my income in taxes in the future, so I'd rather pay it now at the lower share rather than waiting for the axe to fall later on.

- Take Your Capital Gains While Tax Rates are Low

The capital gains tax rate is between 0-15%, depending upon what tax bracket you fall in. However, in 2011, the top rate will be 20% - and everyone will pay at least 10%, so it may be in your interest to sell the stock before the end of the year. For example, say you have a number of shares of stock that you purchased when your child was born and sat aside for his/her college fund. Let's further assume (hope) that those shares have appreciated since that time and would be subject to capital gains taxes. Although your child may not need the funds for another year, it might be prudent to sell and be taxed at the lower rate rather than waiting until 2011 and then placing the money in a CD or other low-risk (can't say anything is risk-less any longer) investment instrument.

For the full list, click here.

Woman Takes on the IRS - And Wins!

In a story that should be encouraging to the Everyman out there, a Maryland woman has defied the odds and successfully challenged the IRS. The topic? Tuition for her M.B.A.

Why should you care? First, there is the obvious reason in that it may make it easier for you to deduct your own education expenses. However, I think it is also a step in the right direction for the empowerment of the Everyman in their ongoing battle to retain what they have rightfully earned.

Look, I'm not someone who advocates cheating on your taxes. By all means, give to Caesar what is Caesar's. However, if you can reduce your tax liability within legal parameters, why would you turn that opportunity down? Sure, the government has proven to be responsible investors and a fine example of financial responsibility (yes, that is sarcasm), but I have faith in you, the Everyman, to be able to do with your money what you wish.

Anyway, back to the story. It was ruled that the nurse from Maryland was correct in deducting her tuition expenses on her tax return for her M.B.A. from the University of Phoenix (nearly $15,000). What is more interesting is that she represented herself! Not only did she take on the vaunted Internal Revenue Service, but she did it without lawyers. There is a God!

Taxes on the Internet

There is an interesting article on the WSJ site today touching on the topic of whether or not online gambling winnings are taxable (the answer appears to be yes - go figure...), as well as the rules for deducting your losses (MUCH more vague). If you want to read more, you can check out the article here (subscription may be required).

This leads to my question - another online tax question - when do you have to pay sales tax on the Internet?

Why is this important? If you can get free shipping on an item - and avoid paying sales tax on the item - it can be a significant savings to you. For example, if you were to find a site offering free shipping on a $500 item, you could save $35 if your state had a 7% sales tax.

According to the NOLO site,

If an online retailer has a physical presence in a particular state, such as a store, business office, or warehouse, it must collect sales tax from customers in that state. If a business does not have a physical presence in a state, it is not required to collect sales tax for sales into that state. This rule is derived from a 1992 Supreme Court decision which held that mail-order merchants did not need to collect sales taxes for sales into states where they did not have a physical presence.

It is also noteworthy that some states do not have sales taxes (Alaska, Delaware, Montana, New Hampshire, and Oregon), so they do not suffer any losses through these rules.

So unless the retailer has a physical presence in your state, you are not required to pay the sales tax on that purchase. If you do live in that state, you'll be asked to pay the additional amount to cover the sales tax (this is why you'll see a tagline that reads something like "residents of VT, please add 7% sales tax to total). However, it should also be noted that, theoretically, you are liable for the tax even if they do not ask for it if they actually do have a physical presence in the state. No word on if or how this is enforced, but you can no longer argue that you didn't know about it!

Still, there are ways to save money by purchasing goods online, especially if you can get cheap (or free!) shipping. Just another way that Everyman can save a bit of money!

Cash for Clunkers - Not a Good Idea

Okay, everymen (and everywomen), it's time for a thought about government intervention:

So our spend-and-tax federal government has decided to continue to offer the "Cash for Clunkers" program, which effectively provides up to $4500 to those who will turn in their less-efficient vehicle and purchase a new, more fuel-efficient vehicle.

Don't fall into this trap! Unless you can afford to go and pay for the car up front, you'll end up doing what many participants of this program are doing: taking out an auto loan. Instead of driving that "clunker" - which in many cases is really a pretty good vehicle - that you've had paid off for years, you'll now saddle yourself down with an additional liability - a car payment. There are very few things in this world that this author despises more than a car payment. Not only does the vehicle depreciate with every mile that you drive it, but you also pay interest charges and other financing fees to drive the depreciating asset into the ground (sometimes literally!).

Couple of thoughts:

1. Most people are not going to get the benefit of $4,500. This would entail that your car was literally worthless. If your car was worth $3,000, they are NOT going to give you $3,000 + $4,500 for your car. No, you'll still only receive $4,500. So when you try to justify the purchase of a new car by telling yourself you're getting $7,500 or $4,500 off, don't fool yourself. You're really only getting $1,500 more than you would have had you traded your car in before this program. Is it really worth putting yourself into a position where you have monthly payments to drive a depreciating asset for a $1,500 break on the new car?

2. More directed at the government: say I was driving around a 1987 Caravan (I apologize if some car fanatic out there is saying "they weren't around then!" - I'm not sure when they were first produced, but that's not the point). And my neighbor, who is relatively better off than I am, is driving a 2000 Caravan. While I might be able to get $4,500 for my nearly worthless '87 Caravan, I can't afford to pay for a new car, even with the $4,500 'discount'. Now my neighbor: he can afford to go out and get that brand new car through the "Cash for Clunkers" program. What happens to that 2000 Caravan? It gets destroyed (by law, they must destroy the engine/tranny). Therefore, I'm still stuck driving an even less fuel-efficient vehicle, while a newer one is destroyed. Not only is it a waste, but it decreases the number of used vehicles available - driving the price of used vehicles higher - and giving less work to your local mechanic.

Does anyone else find it interesting that the government is running this program - and they are one of the largest shareholders in the industry? Go figure...