What, No Corvette?! Teaching Kids About Money and Saving Should Start Early
Posted in: Today's ChiliLike many 14-year-old boys, my son loves sports cars and is always researching the latest models, engine sizes and top speeds. So I wasn’t surprised when, on the way to a soccer game recently, he said, “Hey, Dad! Take a look at that cool Corvette!” Shiny, sleek, cherry red and zipping past us — I had to admit, it was eye-catching. But what he said next took me aback: “C’mon, Dad, you should buy one,” he said. “They’re only $57,000.”
To my son, $57,000 seemed like a relative bargain when compared to the Ferraris and Lamborghinis he sees in magazines and online, with prices approaching $400,000 to $500,000. Thanks to the Internet, music lyrics and the chatter loop in school, kids today seem to know the price of everything. Walk down the street and they’re running the numbers — the $120 brand-name sneakers, the $200 jacket, the $38 shirt, even when bought on sale. They can’t afford these things, but they have the information at their fingertips. They even know the value and price of their house — and of all the houses in the neighborhood.
However, for many kids — my son included — understanding what it takes to pay for these items is another thing entirely.
Seizing the opportunity for a teachable moment, I asked my son: “Do you know what the typical household income is in this country?”
Shrug. “Not really.”
“Just about $50,000.”[1] Through the rear-view mirror, I see the gears turning in his head. This was one number he didn’t know.
“Well you could borrow the money!” he exclaimed.
“Now, it might be possible to get a loan so you wouldn’t have to pay the full price right away if, as a grown-up, you were truly in the market for a car like that. But you’ve got your rent to pay, any idea what that might cost?”
Another bewildered look. “Probably about $1,000 a month, depending on where you live, so that’s $12,000 a year.” I continued, “Of course, you’ll have a few other things to buy, like food and health insurance. All that will take a lot of your paycheck. And don’t forget about taxes — they’ll probably take most of the rest. And then there’s retirement and the cost of college, if you have kids. You need to save money for those things. So, I don’t see a lot of money in there for a Corvette. Besides, a Corvette only has two seats. If Mom and I were sitting in the front seat, where would you sit?”
Admittedly, I was laying it on to make a point, but I thought it was important for him to know that the price isn’t the full measure of any purchase. And I wanted to remind him how expenses and savings should take priority over buying a flashy car of any make or model.
This discussion got me thinking. When I was about my son’s age, I measured costs in the number of weeks it would take me to earn that much money on my paper route. I never thought of buying a car, but I did covet a bike, a new one that was bigger and spiffier than the unremarkable two-wheeler I was riding. I had lingered in the local bike shop and learned there were basically three types of bikes — the decent one, the good one, and the really good one. I decided on the good one for $145.
My parents agreed to kick in half as a birthday present, but I had to come up with the rest from my paper route money. I earned about $7 a week, a dollar a day, delivering papers to more than 30 houses in my neighborhood. I’ll never forget, after about ten weeks of getting up at 5:30 in the morning and tossing rolled-up newspapers onto front steps, how I counted out the crumpled tens, fives and singles on the kitchen table until I reached $72.50. Decades later, the price of that bike is firmly etched in my mind because I know exactly how hard I had to work to earn the money to pay for it.
This is the true price, and kids rarely have a sense of that. To be sure, as a kid, I didn’t have to think about a mortgage or rent payment, paying for my own meals or paying to see my pediatrician, so I could tuck my cash into the stash and buy that one cool thing. But paying for that bike helped me learn about earning and saving in a way I remember to this day. Giving kids an opportunity to learn these lessons is even more important these days. Sure, it takes time, patience and a lot of conversations, but — much like savings — the lessons add up over years.
It’s important to start when they are young: A child as young as three can start to get a sense of how much things cost. When a daughter goes with her father to the grocery store, for example, he can point out simple prices, like a dollar for a can of soup, another dollar for two apples, and a third dollar for some bread, and then ask her: “How much does that add up to for dinner?” Suddenly, food doesn’t just appear; it’s paid for. And parents can reinforce the idea of saving money by giving a child a piggy bank or a savings jar to be filled by a small allowance of a few coins each week, so she can watch the little pile of money grow.
A few years later, starting when a child is seven, parents might go further to having three savings jars: One for the occasional splurge (like my bicycle), one for expenses and one for charity. I think of this as the “bucketing” strategy. It’s a good way to make clear that charity isn’t just for left-over money, but it is a basic element of any budget. By separating out those major purchases, parents make clear that some things will have to wait until a child has the money for them.
In another few years, at age 11 say, a parent might add a savings account to the mix, giving a child a place to deposit cash from odd jobs or a birthday check from a grandparent. That’s a great time to talk more about the value of savings — that saving means keeping. And it’s not too soon to start introducing the concept of a budget, to demonstrate that money is finite and everyone has to make choices. For the average family, a mom might point out that she has $350 to get through the week, and if the groceries run $100, how much does that leave for everything else? She might even mention this to her son when they’re out shopping. “I can’t afford that this week,” she might say. “So I’ll have to wait until next.” That way the child learns about waiting, always a good lesson in personal finance.
By 14, a teen might be ready for a lesson in investing, perhaps by hearing from Mom or Dad about an investment decision they might have made recently, and why they made it. A parent might have made a shrewd move to get into the stock market after a slump, when solid companies seemed undervalued. Then everyone in the family can track those stocks, possibly with the awareness that those investments represent a good portion of money earmarked to send the children to college. Or teenagers might begin to invest small sums in stocks of their own, and explain why they picked them — not just because they were brand names kids know and like, but because the company had good growth prospects.
It’s certainly not unrealistic to expect children to start to take on small jobs, the equivalent of my paper route, to get a more immediate sense of the value of money. But the budget lessons are never done, and it’s important for parents to keep making distinctions among major purchases, continuing expenses, savings, investments and gifts to charity — all while operating within the parameters of what they have to spend. Parents should be open with their kids about the financial choices they make, in order to better encourage their children to make wise choices, too.
As kids get closer to 18, it’s important for parents to start talking to them about “the burn-to-earn” ratio. What that means: It doesn’t matter how much you make, as long as you save something off the top for retirement and college, and then live on what’s left. And the numbers will change. We can expect that our cost of living will go up, and we hope that as we gain skills, responsibility and education, our wages will increase, too. So it’s important to save more over time and to avoid the temptation to increase your lifestyle with your paycheck. In fact, kids in their late teens aren’t too young to hear about the importance of enrolling in an employer’s 401(k) savings plan as soon as they get a job.
The world of money isn’t complicated if young adults are prepared for it. Just as schools gradually bring kids along in math and history and all the other subjects, parents can slowly introduce their kids to money and saving, with each stage of their understanding leading to another, until these children emerge as young adults who understand the cost of living — and know that a Corvette, for most people, is best admired from a more practical set of wheels.
About the author: John Sweeney is executive vice president, Retirement and Investing Strategies for Personal Investing, a unit of Fidelity Investments, in Boston. Follow him on Twitter @SweeneyFidelity.
[1] Median household income was $51,939 in 2013, Income and Poverty in the United States: 2013 Current Population Reports Issued September 2014 P60-249 By Carmen DeNavas-Walt and Bernadette D. Proctor, Issued September 2014
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