Fiscal Fitness for Teens


By Isabelle Sender From Standard & Poor's weekly investing newsletter, "The Outlook"

With school out, many teenagers will begin collecting their first paychecks. Now is the time for parents and grandparents to initiate a dialogue about the importance of saving as well as the value of planning and investing to meet objectives.

Start by asking your working teen plenty of goal-oriented questions, suggests David Braverman, vice-president for portfolio services at Standard & Poor's and also a father of four, ages 13 to 21. Adults "may not want to see their kids spend money on short-term goals such as clothes and music, and may not realize that, to a teen, a long-range goal is a car," Braverman says, adding that adults should use their own wisdom to help kids strike that balance between short- and long-term goals.

BEYOND THE MOMENT. Demonstrating to teens how, over many years, compound interest can turn very small amounts into large sums should encourage them to save on their own, according to the new book The Financially Intelligent Parent by Jon and Eileen Gallo (New American Library; $12.95).

The authors point out that teenagers often focus on the moment, neglecting the longer-term consequences of their actions. Just as poor grades can affect their career path, a poor savings rate might detract from their future happiness.

Adults can drive the point home by presenting a scenario like this: "At age 18, you decide not to buy snacks anymore and, instead, save $4 a day in an account bearing 2% annual interest. Now, tell me how much in savings you will have by age 67. Give up? $319,159."

THE JOY OF SAVING. While imparting your financial wisdom to teenagers, pay attention to their goals as well. If a child wants to spend his or her first paycheck on clothes, suggest that he allocate a percentage of the funds for immediate spending, while setting aside a bigger percentage for longer-term goals.

Explain to teens that their savings and credit habits can influence car purchases -- making the difference between a snazzy ride and an old clunker -- as well as other longer-term goals like paying for college or making a down payment on a first home.

When college students enter the summer workforce, make sure to consider the effect on your own finances, too. Assess your income and asset status to determine tax ramifications of your child's employment, Braverman says.

COVER YOUR ASSETS. For example, if you're subject to the alternative minimum tax, you may want to consider not claiming working college students as dependents, so they can qualify for education tax credits. Your accountant or tax preparer can help you with this calculation. This tax review will also come in handy in family discussions about funding an education and financial aid. You may be able to eliminate some of the guesswork about whether family contributions are realistic or not.

Braverman also suggests asking your tax professional about the benefits (or liabilities) of having assets in your child's name, no matter what your income-tax status. In some instances, a tax benefit may conflict with the potential eligibility for college financial aid.

Families earning less than $80,000 are more likely to qualify for financial aid and college grants than higher-income households. Braverman recommends using online financial calculators to help you figure out the options that fit your situation best.

HIGH-INCOME TRAP. He suggests checking out Finaid.org and Collegeboard.com. Information on the Web sites could have a sobering effect on families earning six figures, despite mortgages or other long-term liabilities, Braverman says. Schools base financial aid more on income than assets, no matter how much debt the family has accumulated, he notes.

For this reason, families with high incomes often benefit from tax-advantaged strategies, such as the increasingly popular and highly flexible 529 college savings plans which, along with Coverdell accounts, are discussed in Braverman's book, The Standard & Poor's Guide to Saving and Investing for College (McGraw-Hill; $14.95).

The 529 tax-deferred plan allows for each parent or grandparent to contribute up to $11,000 annually per beneficiary, and that amount does not count toward an annual gift-tax limit.

ROAD TO PROSPERITY. Ultimately, a young person's first paycheck can serve as a real eye-opener, especially to those accustomed to frequent withdrawals from the Bank of Mom. Handle the pay-stub dialogues well, and your child will familiarize herself with financial terminology and become comfortable discussing goals with you and other family members.

And despite the temptation to spend away that first check, your child may just decide to bank a portion of the earnings, an important first step toward future financial security. Sender is a reporter for Standard & Poor's Global Editorial Operations


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