Teenagers spend more money than ever, but have little understanding of finances.
According to Teenage Research Unlimited in Northbrook, Illinois, the average teen spends about $85 per week, which means the current teen economy tops $141 billion a year. The federal government's Jump$tart survey of over 4,000 high school seniors revealed that 32% used credit cards and 43% had access to ATM machines. Yet the vast majority of teenagers do not understand how to compare credit cards in terms of fixed or variable Annual Percentage Rates, finance charges, grace periods and so forth. They may have a part-time job, but they don't understand FICA deductions.
The average student in the Jump$tart test scored a failing 50%. About 27% of respondents believe there is a national sales tax deducted from paychecks, 52% think if your credit card is stolen you don't have to pay anything if you report it immediately, and 51% believe that earnings from savings accounts are not taxed.
A generation ago, teens learned money management topics like mortgages, compound interest, and the Federal Reserve in "home economics classes," which are no longer taught. Our government has an interest in promoting savings and investment and keeping bankruptcies low, which is why the Jump$tart Coalition first convened in 1995. Within a year or so, teens will again be taught money management with funds from the "Leave No Child Behind" law.
After age 13, only a third of teens receive a regular allowance, yet about 86% gets money from parents on an "as needed" basis. Most experts believe this is the wrong way to teach fiscal responsibility. The only way to teach people how to handle money is to let them handle money.
Kiplinger's Magazine editor Janet Bodnar says you and your teen should estimate how much money he or she needs a week for movies, car insurance, lunches, clothing, the French class's trip to Paris, and so forth. The amount must be adequate: not too much and not too little, and some may come from your teen's earnings. This is a win/win situation: parents control the amount, but the teen learns to budget, invest, save, comparison-shop, spend, and donate to charity. Parents should help teens through the process, but not bail them out from financial binds. Parents should not pay teens to do chores or to keep grades up.
Visa offers a prepaid credit card for teenagers that can provide convenience, yet still keep parents in control of amounts.
David Owen, author of The First National Bank of Dad, actually set up a family bank from which his children can borrow but must pay back interest. "The Bank of Dad" also pays big interest rates to encourage saving.
In many ways our society is very secretive and uptight about money issues. The first banks were in temples in ancient Greece, Babylon and Egypt, but even today, people whisper in banks as if something sacred is happening. Many parents are more comfortable talking about sex than telling their teen how much money they make. However, if you let your child into family budget discussions and demonstrate that even adults must distinguish between wants, needs and what's affordable, you can easily model good money management.
Money issues are often overly emotional in many families. In the case of divorce, one parent may allow the child to spend more freely than the other. Some parents use money as a weapon, a way to wield power or a stand-in for love. Parents have to move beyond their own money issues in order to become role models for rational spending and to teach teens fiscal responsibility.
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