16th November 2007
'Children,' according to Ogden Nash, 'need something to ignore and that is what parents were invented for.' This observation always pops into my head whenever I am trying to persuade one of my own children to do something they are dead set against. Into the category of unreasonable parental requests falls a wide range of activities, from picking their wet towels up off the floor to going outside and getting a bit of exercise.
My objective is, of course, the same as every other responsible parent. We want to equip our children with all the information, wisdom and good habits they need to lead happy, healthy and worry-free lives. This is no easy task, particularly when it comes to personal finance. We live in a consumer society that has largely rejected the principles of going without, avoiding waste, making do and waiting before you get something you want. As a result, it is a struggle to instil in teenagers the basic rules of sound money management: conserve your resources, save for the future and don't borrow unnecessarily. The wide availability of credit - my older children all received credit card offers the moment they turned 18 - is of special concern since it tempts young people to spend more money than is necessarily prudent. The sheer choice and complexity of financial products and services is another issue. It is no easy matter trying to understand all the available options. No wonder that, according to new research by Nationwide Building Society, two-thirds of teenagers do not believe they know enough about finance.
Unfortunately, teaching teenagers about personal finance isn't the same as teaching them about, say, geography, because money is an emotive subject. By the time we reach our teens, we usually have fixed, non-negotiable money beliefs such as: money can make you happy, money is complicated, money is boring, money isn't a polite subject for conversation or money doesn't matter. We are also likely to have developed a set pattern of behaviour with regard to money. One person, for instance, might be miserly and the next a spendthrift. So, if teenagers are to be equipped properly for the financial challenges ahead of them, they must be encouraged to analyse and question their own preconceived ideas.
What else can you do to ensure that the teenager(s) in your life has a positive relationship with money? Below are ten top tips - taken from my new book, The Teenager's Guide to Money. I wrote the guide because when I went to teach my own children about money I couldn't find a single book that covered the subject. It is divided into three parts: Money secrets that will set you up for life explains why money isn't boring and sets out the basic principles of good money management; Things you need to know before you reach 20 covers all the practical issues, such as banking, saving, coping with money at university and avoiding the dangers of debt; and Long-term money matters demystifies such topics as buying a home, insurance and the pensions crisis. Anyway, here are my Top Ten Teenage Money Tips.
1. Make them enthusiastic about money
Recently, I conducted a number of money workshops with school leavers. Almost the first question they would ask me is why they should even be interested in money. My response was to point out that the only boring thing about money is not having enough of it and to stress that by taking the time to understand how it works they are, effectively, guaranteeing themselves a better life. Teenagers keen to become independent can easily relate to the fact that money means freedom. I also emphasised that having money means having choices. If you have sound money management skills, you will be able to make your dreams come true. Teenagers need to think of money as their friend. If they treat money with respect and pay attention to it, their efforts will be rewarded.
2. Teach them the importance of planning
Why does anyone end up with financial problems? Almost always because they don't realise the importance of having a money plan. The first step to developing such a plan is to set short-, medium- and long-term goals. The second step is working out how to make each goal a reality. Teenagers should be persuaded to fantasise about how they would spend money if they had it, before showing them different ways to make their dreams a reality.
3. Encourage them to be patient
It is difficult to get rich quick, but very easy to do if you take it slowly. Demonstrate how saving even a small amount can quickly add up. If you tuck away £1 a day starting on your 18th birthday, it could be worth as much as £118,025 - or more - by the time you are 60.
4. Warn them about getting into debt
The single most useful lesson any teenager can learn about money is: never borrow a penny more than you absolutely have to. When you borrow money, what you are doing is saying goodbye to a portion of your future income. The more you borrow, the more of your future income you are giving away. Also, even if you can afford to make all your loan repayments, you are still in debt.
5. Explain how easy it is to budget
Teenagers more readily embrace the concept of budgeting when they discover that it has nothing to do with self-denial but is simply about making a plan for how they will spend their money over a specific period.
6. Explain why waste can seriously damage their wealth
For years, my children would roll their eyes when I went round the house switching off lights or complained when they were talking on the telephone for too long. Eventually, they were persuaded that what I was doing was worthwhile when I offered them a percentage of any utility bill savings we could make as a family. I reinforced the message by pointing out that everyone in the world - even Bill Gates - only ever has a finite amount of income and that, once you've spent it, you can't get it back.
7. Teach them to shop well
No financial ill can befall a teenager who shops carefully. Teach them that 'value' for money means more than just the lowest price but can incorporate convenience, service, quality and speed of delivery. Verse them in the art of negotiation.
8. Check they know how to work out a percentage
No child should be allowed to leave school without being able to calculate a percentage. The word 'percentage' literally means 'parts per 100' - cent being the Latin word for '100'. Because percentages always deal with parts per hundred, they allow you to compare things that would be very difficult to compare otherwise. They are particularly useful when it comes to deciding whether something is better value (or more profitable) than something else. Let's look at a really simple example. You have 25 bars of chocolate. Of these, 22 are Mars Bars. How can you express this as a percentage? The fraction is:
22 (Mars Bars)
25 (Total number of bars of chocolate)
When you divide this out (22 divided by 25), you get the answer 0.88. When you multiply it by 100, you get the answer 88. So 88% of the bars of chocolate are Mars Bars.
9. Emphasise that the interest rate always matters
If there is one area of personal finance where consumers are too complacent it is that of interest rates. They accept too little when they invest and pay too much when they borrow. Teenagers need to be warned against taking too easy-going an attitude, as even a fraction of one per cent can make a substantial difference to their finances.
10. Spell out the price of not looking after your money
Financial ignorance leads to poor financial decision-making. It means being burdened with unnecessary debt, having to work harder and longer, losing out on opportunities and frequently - for those in relationships - suffering heated arguments.
Read extracts from the book The Teenagers Guide to Money:
Money secrets that will set you up for life (PDF 113KB)
Have money, will travel (PDF 220KB)
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