Teenagers: Often derided as irrational, emotional, and impulsive. But the teen years aren’t totally bad. Teens are cognitively mature enough to understand more complex reasoning (unlike younger children) and not yet set in their ways like adults. The impressionable teen years are the perfect time to assimilate children into the cult of long-term financial goals and smart investing habits.
Here are four ways to teach your teens about investing, in order to set them up for a good financial future.
1. A Summer Job Can Really Add Up
Show your teen how a summer job (considered a classic institution of adolescence), can buy them a brand new car. Doing some quick math, the average teenager can make around $3,600 in a summer by working a minimum wage job (12 weeks times 40 hours per week times $7.50 per hour), or possibly by mowing a couple of yards a day, or babysitting.
The $3,600 won’t buy more than a very old used car if spent immediately. But this is the perfect time to introduce the power of compound interest to your wannabe capitalist teen.
$3,600 invested long-term at 7% returns will grow to almost $10,000 in 15 years which will afford your teen a nice used car. Let it ride for another ten years and your teen will have $19,500, or enough to purchase a brand new Honda or Toyota sedan (or some other cool car that teens actually lust after!).
Or if they are willing to save summer job earnings from all four years of high school, explain how they could even buy a vacation home with their savings. Show them how $3,600 saved for four years will be $14,400 later on. Invest that for 40 years and your teen will have $215,000 to buy a sweet vacation home in cash (when they are old enough of course).
The point of the exercise is to show your teen the amazing power of compound interest. A small amount invested today will grow into a huge sum over long periods of time.
2. Show By Example (Even if You Messed Up)
If you are an all-star saver and investor and on your path to financial independence while your kids are still teenagers, let them know! You don’t necessarily have to give your child a soft copy of your net worth spreadsheet (you have one, right?), but you can convey the power of saving and investing and how it brings security to the whole family.
Grab a copy of your brokerage statement that shows a ton of dividends or interest payments. Show your teen how you make a few thousand dollars just by holding investments you’ve acquired over the years. Explain how your investment accounts hold enough money to provide for family expenses for many years, even if everyone in your household suddenly lost their jobs.
College savings are very relevant to teens. If you have done a great job saving for your teen’s higher ed expenses, whip out the 529 account statement and show off your investment returns over the years. If you started contributing to the 529 when they were newborns, it’s very likely the initial contributions have doubled or tripled by now!
Or maybe you got a late start at investing and have saved almost nothing. There are lessons to be learned even from failure! Show your teen how bad choices in the past cost you a ton of money in forgone returns. Maybe you dropped $2,500 on a weekend trip to Vegas gone horribly wrong (“I know it’ll come up red this time!!”) with your fraternity brothers when you were 22.
Fast forward 20 years and you would have had nearly $10,000 if you could have earned 7% per year on the $2,500 lost at the tables on that free-alcohol filled weekend blitz in Vegas. Depending on your teen’s sense of humor (and your 529 account balance), you can joke about how handy that $10,000 would be these days to pay for a year of tuition at State U.
3. Check Out the Charts
Sometimes graphics convey a message that can’t be conveyed in words. Take a look at a chart of the S&P 500 over the last three decades.
Starting at 167 points 30 years ago, the S&P 500 is fluctuating around 1,950-2,000 points today (October 2014). That’s a gain of over 1000% in 30 years. We might have to start referring to it as the S$P 500 index! The growth over time is astounding.
Another great lesson from the chart is the rough patches of 2002-2003 and 2007-2008. Long-term investing means sticking with your investments in good times and bad. No one enjoyed losing money during the bear markets in the 2000’s, but the chart bears out how patience and long-term investing pay off.
The last five years of the chart show phenomenal growth — something market timing investors might have missed out on if they abandoned the markets at the bottom in March, 2009.
4. A Real Life Money Tree
If your teen isn’t sold on the abstract benefits of long-term growth of investments, let them in on the secret of dividends. Dividends are little gifts that keeps giving year after year. If they invested $10,000 into something awesome like AAPL* (instead of a drawer full of disused iPhones, Macbooks, and iPads) they would generate $192 per year in dividends — with that payment growing each year based on historical results. Those dividends get paid every year. Forever. And tend to increase over time.
The most important lesson to remember when teaching teens about money? Get ’em while they are young.
Whether your teen is a math whiz or the creative type, talking about long-term investing in a variety of ways can get the idea of wealth building into their minds. They may not be maxing out their Roth IRAs and investing for the long-term by age 16, but at least they will know it’s a great option later in life.
Eventually (we hope!) they will get decent jobs, contribute to their own 401k’s and IRA’s and grow wealthy over time, too.
*Disclosure: I own shares of AAPL through index funds and mutual funds but currently have no individual holdings of AAPL.
Readers: how do you teach your teens about long-term investing and wealth building?