What does your teenager know about money and what should they know?
Success with money begins early and is a skill that grows with experience. You need to participate to learn. Like golf, you cannot learn it from a book or a DVD. Books and DVDs can help but the important parts are experienced.
There are only a few things that are important.
- Money is value that a person receives in exchange for some other value they gave up. Wages are in exchange for effort and time. Interest is in exchange for waiting to use the money. Profit is the return for investing and providing skill, time and effort.
- Money is the method that allows the time of earning and the time of spending to be different. A $20 bill in a drawer will buy something another day and waiting will not diminish it.
- If someone gives you money, they are essentially giving you some past effort that they have made. There is no free money.
- Governments want to spend money and they have none of their own and no way to earn any. They need to take it from the people. All government money is the people’s money first. A citizen should notice that it would work better if the government spent less or at least spend what they take wisely. Be aware of governments. They will likely be your single larges expense.
- There is a difference between earning money and getting money. People can get money in many ways. Gambling is one, albeit unevenly profitable. Reorganizing the capital in a publicly traded business is another. Packaging and unpackaging assets is another. Remember mortgage backed securities. The most insidious “get money” deal is credit cards. Few ads show the pain of getting out of credit card debt. The pain of payments and the cost of interest lasts much longer than the joy of dinner.
- Money is time and skill and effort. Sometimes spending makes sense if they think about it in terms of hours instead of money. Is a video game worth five hours of working at a menial job with people who don’t treat you very well?
- Don’t spend all your money as you receive it. If you do then you can never save and you cannot repay a debt without reducing your lifestyle. Most people do not like reducing lifestyle. Better to not start by spending all your money.
- You can only spend a given dollar once. You cannot have your cake and eat it too. When you decide to spend a dollar on something, it automatically means that you choose to not spend it on anything else. Pay attention to what you have decided to exclude. It is very easy to miss that the dollar you spend today was actually committed to be spent later for something more important. In simple terms, you cannot buy hockey tickets today with tomorrow’s gas money and still expect to get to work.
Teenagers need money in order to learn what it is for and how it works. Ideally regular income for required work. Be sure they have enough to make some stupid mistakes. Advances are okay but they must be repaid from reduced future income. Do not bail them out when they do make mistakes. They need to learn that once the money is gone, it is gone forever. The only way to pay off a debt or to save capital is to reduce lifestyle. They will learn this lesson eventually, better they learn it when they are 17 than when they are 32.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.