No matter how rich, middle class or financially strapped you are, once your little darling becomes a teen, you will start feeling like the ATM machine. While holding the purse strings can give you power to impose positive incentives (such as "clean your room and take out the trash to earn your allowance"), if you are making all of the financial decisions in your teen's life, you are not giving her the skill set she needs to become employable. Below are a few tips to implement a budgeting plan that will provide a solid foundation for your teen's life as an adult, which is just a few years away.
Teaching Teens the Thrive Budget™
The power of the Thrive budget is that, in the words of Dr. Gary Becker, who wrote the preface of my book, You Vs. Wall Street,
Imagine what a leg up your teen has on the world, if you can start making the Thrive Budget a daily fiscal habit. It works so much better than the Buried Alive in Bills and the Struggling to Survive budgets, which are employed by so many...
Considerable amounts are set aside for basic needs, education, charities, and fun things to do. This may seem obvious, but many people, including educated men and women, need help in making such basic allocations of their resources. They often get into trouble when they neglect to follow simple and fundamental rules of the type provided in this book.
Here are eight easy ways to start.
1. Income: Treat any allowance you give your teen as income (i.e. tasks and chores = weekly allowance), and, just like an employer does with a 401k, set up a brokerage account for your teen where they can deposit 10 percent of their income first, before anything else is purchased. Paying yourself first is one of the best habits you can develop. Possible accounts to consider opening for your teen include a Dependent IRA (if your teen is working and earning money on a 1099 or W-2 basis), a custodial brokerage account or a college fund. Have your teen assign goals to the fund, such "Buy My First House" or the "Go to Medical School" fund.
2. Money While You Sleep: Another important skill is to learn the power of investing -- in your first home, in your nest egg and in education. In a nut shell, if your teen saves 10 percent and that earns a 10 percent return (what stocks and bonds have done over the past 30 years), her nest egg will be bigger than her annual salary in seven years and it will earn more than she does within 25 years. That means, if she starts at 18, she can retire before the age of 45.
3. Gifts: Friends and family often gift cash to teens on holidays and birthdays. Encourage your teen to deposit 10 percent or more of any cash gifts s/he receives into the brokerage account. Also, since gifts are "income" to a teen, use the Thrive Budget for this cash, allocating the rest of the money according to the "50 percent to Thrive and 50 percent to Survive" plan, which is outlined in greater detail in the next steps.
4. Financial Literacy. Discuss which companies your teen would like to own stock in. Your teen will be far more "invested" in this account if some of the companies s/he invests in are near and dear to his/her heart. However, s/he should also learn the basic skills of successful investing, including Modern Portfolio Theory, diversification, owning funds to reduce risk, rebalancing, etc. Buying a home (that you can afford) offers so much in ROI (Return on Investment). You get to live in it. You can write off the interest you pay, which is a substantial portion of the mortgage payment. And, if you purchased your home at a good price, you have the added potential for an increase in the value of your home. Your teen isn't ready to buy a home today, but the money in her brokerage could be used for the down payment in a few years, when she is.
5. Charity: Many religious organizations ask teens to give 10 percent of their allowance to them, an excellent habit to start early. Charity really empowers the individual who gives and teaches essential leadership and partnership skills, so do not underestimate the power and message of helping others with time, talent and money, even if the family funds are tight. The people you share your spare time with, through charitable endeavors, are "your people." In addition to supporting the teen's favorite charity, consider taking at least one day each year to volunteer with your teen. You'll be surprised how much fun this can be -- whether you are building a house with Habitat for Humanity, cleaning up the beach, collecting holiday gifts for abused children or serving Thanksgiving dinner to the homeless.
6. Education: 10 percent should also be going into an education fund. Remind your teen that education is the highest correlating factor with income, and that if s/he wants to enjoy the freedoms of earning a good salary, getting a great education is the first step! Again, this will compound a lot faster if you have a solid investment strategy that earns 10 percent annually.
7. Fun: A sustainable amount of "fun" in any budget should be around 20 percent. This is easy to calculate -- $2 of every $10 earned. If the Buy My First House fund, charity and education dollars are all deposited automatically, that's the best assurance that money will not be overspent on retail therapy. Also, do fun things on a regular basis with your teen that are free or cost very little. A pickup game of soccer at the local park. Picnics. Go to the museum on the free day. Host a potluck family night. The idea is to associate fun with investing, rather than spending, while at the same time building a greater appreciation for the gifts that money can't buy.
8. Basic Needs: Most teens, and even college students, have their basic needs taken care of. However, why not make your teen responsible for her personal items, like shampoo, new clothes (beyond the basics) and snacks? This teaches the teen to search for bargains to stretch the value of his/her own dollar. The real world is a far better teacher than math games.
With electronic banking, depositing into banking and brokerage accounts and monitoring the investment returns should be fun and easy to do. Essentially, you set it up once and then look at the investments and returns quarterly (not obsessively). Consider taking a few hours every three to four months to evaluate the account with your teen. This is as fast and easy as a few clicks on the computer. If your teen is really into learning, teach them how to do Stock Report Cards and to evaluate good companies to invest in using the Four Questions for Picking a Winner. Learn more in the chapters, "Stock Report Cards" and "Hitch Your Wagon to a Star" in You Vs. Wall Street.
A lot of people complain that today's younger generation wants everything handed on a silver platter, instead of taking the time to teach them the value of earning, investing and fiscal fitness. Make these strategies part of the routine and this becomes the way life is for your teen (instead of something to argue over). If your teen is responsible, independent and fiscally fit, they are better equipped to do a great job in college and the work force -- instead of hitting you up to sleep on your couch.
My Thrive Budget is outlined in greater detail in my book "You Vs. Wall Street".