save how, why, what?
March 11, 2006 8:02 AM   Subscribe

How much should a teenager save? And how and why? (Plus complications)

Our daughter is working hard and saving money for a trip to Europe this summer (she'll be eighteen then), and to get a car. She has checking and savings accounts and manages her affairs well -- school is fine and social life is neither overblown nor neglected.

I'd like to encourage her to put some money into longer-term savings. What long-term goals should I suggest, how much should she save, and in what shape should it be saved?

Answers to the simple question would be nice, but there's more:

The extra problem is that I don't think this country's financial future is very pretty (nor the world's in general as we humans madly consume our way to ruin, but I try to keep such bleak views repressed. Life is hard enough for teenagers without being shown visions of coming miseries.) So I can't advise her to, say, open a CD account.

Is it possible, or advisable to try to build a nest-egg that could withstand turmoil? And if it is, then at what point do such savings become "usable"? To buy a house? To escape national economic collapse? For retirement? As capital and live off the interest? At this point the what-if's get too much, but any ideas will be helpful.
posted by anadem to Work & Money (13 answers total)
I put 1,000$ in the bank for each grandchild when they were born, not for college, for retirement. Depending on how the interest goes, it could turn into a substantial amount in 60 years. Perhaps she could start now, and if really ambitious, add to it until it equals the interest she would have earned if it had been put in 18 years ago.
(My father was very strong on the miracle of compound interest. I wish someone had done that for me.)

I have all my money in CD's because it's FDIC insured, but that's just me, and I'm older now. I've seen a number of boom and bust cycles, and the only way I can lose it is if the government collapses, and if that happens, we're all going to have worse problems to worry about. "That's just my opinion, I could be wrong."
posted by unrepentanthippie at 8:12 AM on March 11, 2006

I would tell her to save as much as she can. Period. Enough to pay for her whole trip to Europe. Enough to buy a car. Enough so you don't have to help her. Enough to start that nest egg. I had about $1500 saved when I left college and I started investing that immediately after I graduated and got a job. I've invested in mutual funds, 401K, CD's, stocks, bonds, cold-hard cash. I've got it spread all over in 3 different companies (Schwab, Dodge & cox, Wells Fargo). Then I figure if one or more goes, I still have money in other forms and companies. My two-year old daughter has 3 different accounts, too.

You can never teach your kid to save enough money (and therefore the value of money) especially in this day and age where everyone lives for now, no delayed gratification and deeply in debt. Whenever I get a raise, I don't "see" that money-it goes directly to Schwab account. I continue to live on the same amount every month. I don't make a lot of money, but I save and save.

Teach your kids this now. I would help her open a Schwab no-cost account and maybe pretend to "invest" in some stocks and mutual funds by "watching' them on her watch list and seeing how they do, and after a few years, she can acually start investing her money for real. Then she can diversify as she saves more and more.
posted by aacheson at 8:28 AM on March 11, 2006

My advice would be, unless the amount saved can be really significant (tens of thousands), the money can be far better used to gain life experience at that age, if it's a trip, or books, or bubblegum or whatever. Assuming she puts away 2k right away. That means that that 2k is unavailable to use, and if everything goes right, maybe it doubles in 10 years to 4k. Is it worth to forgo spending that money now and depriving oneself when one has little responsibilities in order to double a relatively insignificant amount when one will have many responsibilities? Unless the savings are for higher education, personally, I wouldn't encourage a teenager to start saving for the long term until they're actually making a salary (say 21, 22+). The benefits of saving and money management can be taught via little saving projects, like you mentioned for the vacation and the car. Unless there are special reasons as to why this person might need long term savings, I say let them live before the soul-crushing drudgery that is the accumulation of wealth becomes their reality.

If they are hell-bent on putting some away, the investment vehicle would depend on the goals. If you're concerned about weathering an economic storm, CD's and guaranteed investments are the way to go. If you're saving for retirement, 50 years down the road, a basket of high risk, speculative stocks and mutual funds would likely be your best bet. Personally, I always recommend index funds. Low maintenance fees, relatively diversified, so on. Perhaps mixed with a bond fund and some money market stuff. Foreign bonds are also good. Israeli savings bonds are offering 5.3% for a ten year bond. Which is pretty good considering the US is offering about 1% less. If you're really concerned about the country's economic future, there's only one option. Hard goods! Buy a safety deposit box and as much gold and platinum, and silver and copper certificates as you can!
posted by loquax at 9:32 AM on March 11, 2006

To add to my comment, I would say that teaching a teenager not to spend above their means, and especially not to go into debt is far more important in this age of easy credit than teaching them about compound interest and the stock market. If your child never gets a credit card, or at least knows how to manage it properly, they'll be fine, almost no matter what. Assuming of course that they are generating an income after graduation.
posted by loquax at 9:39 AM on March 11, 2006

I've heard breaking earnings up into thirds is a good approach for kids and money.

One third can be spent on frivolous stuff - CDs, Clothes, Gas, whatever.

One third is for medium term saving -- that is you save until you have enought to get yourself something really cool like a DVD player, that trip or a car.

One third is for long term savings. That could be school and/or retirement. I know most kids aren't going to naturally think about saving retirements, but it would be good to establish the mindset of saving for the future as early as possible.

You could also think about having them take 5% off the top for charity if you want to encourage that kind of thing with them.

I know you're worried about the direction the country is heading in, and inflation likely will eat into long-term savings, but the time frame for somebody that age is so long it's not as large a concern. And, it's more about establishing good habits early than anything else.
posted by willnot at 9:43 AM on March 11, 2006 [1 favorite]

I don't think it matters. Delayed gratification is what you are trying to teach her, and it's essentially the same lesson to save for a few years as to save for 60.

She should first save for things that she will need to pay for, like the trip, and college. The only exception would be to contribute towards matching funds if her workplace offers them (probably doubtful). After college she'll have more earning power and can make a long term plan.

If you do want to have her save for something longer term, maybe a house would be better then retirement? It's a more fun thing to save for then being old.
posted by voidcontext at 10:32 AM on March 11, 2006

the money can be far better used to gain life experience at that age

No kidding. Have all you people forgotten what it's like to be a teenager? You want a seventeen-year-old to be saving for a house and retirement? Why not have her pick out a grave site while she's at it? It's great that she's saving for a trip to Europe, and she's obviously doing well in school and managing her money and her life; be happy with that and don't try to turn her into a compulsive money-hoarder. I didn't save a damn thing at that age (in fact, not really until I was in my 30s) and I'm doing OK.
posted by languagehat at 11:36 AM on March 11, 2006

Israeli savings bonds are offering 5.3% for a ten year bond. Which is pretty good considering the US is offering about 1% less.

This probably won't get you any greater return than investing in the U.S., unless the U.S. has a major unforseen devaluation. For instance, I'm pretty sure the Canadian equivalents of CDs have been doing better, even though the interest rate is a full 1.5% lower in a lot of cases, because of the appreciation of the Canadian dollar. So you can take the higher interest rate as a sign that the currency the investment is in is likely to lose value more quickly than the U.S. dollar.
posted by oaf at 11:51 AM on March 11, 2006

I don't understand why you think she shouldn't get a CD even despite your negative view of the country's long-term future. You can get relative short-term CDs, say, 1-5 years. Unless you think the country is going to go to shit in a year, in which case, she might as well keep it in her mattress or better yet buy gold or currency for a country you don't think is going to go to shit.
I would think a good "long-term" goal for an 18-year-old would be to be able to finance an underpaid or unpaid job/internship while in college (assuming that's what she'll be doing for the next few years). If she goes into an area that does not have a lot of paid opportunities for inexperienced people, the freedom to get experience without going into debt is a really good investment.
If you think this situation is possible, find a good internet bank (ING, maybe) and put some money into a short-ish term CD, then in a couple years she can reevaluate her needs and goals and go from there. Thinking about retirement at 18 is a noble goal and all, but finding a career is probably more important at this point.
posted by ch1x0r at 12:05 PM on March 11, 2006

It sounds like your daughter is already ahead of the curve by planning ahead and saving for her summer expenses. You might work with her to find the best ways to maximize returns on those savings by buying short term CDs.

Saving for turmoil? While the idea has some merit, take a clue from the depression. People who had their nest egg saved up in the form of stocks, bonds or even bank savings accounts got screwed and lost everything. There is no 100% safe means of saving money in banks. Property has a better value than saving accounts. Other investments such as gold or silver may be better for any potential economic collapse. Ideally you should diversify your portfolio and hedge your bets. But regardless, she should start saving for her future now. The earlier, the better she will be.
posted by JJ86 at 3:19 PM on March 11, 2006

You have a 17 year old who is saving already, for 2 terrific goals, and seems to have learned important lessons about handling money. Congratulations on doing a great parenting job. Any savings she has are likely to be taken by school costs, so unless she is able to be financial-aid free, she's better off with a reliable car and no credit card debt.

Long term, if you feel really dire about the economy, property with some possibilty of sufficiency is a good investment. I wish I'd invested in a couple of acres 20+ years ago. What I did invest in was a business that taught me a lot, and that I sold profitably to buy a house, so it's all good. Encourage her to get great skills, which will give her the confidence and ability to achieve.
posted by theora55 at 4:08 PM on March 11, 2006

Get her a Roth IRA. The "miracle of compound interest" works better when there are no taxes calculated on the interest, and no capital gains taxes on securities.

Im not sure how important it is to contribute that much money to it now, but it is a REALLY good idea to contribute the maximum limit every year after she graduates from college. Without fail. No matter what. Even if she doesnt put in much until she has a full-time job, you have greased the wheels by setting up the account, and having it available to her when she does start making substantial amounts of money.
posted by Maxwell_Smart at 4:59 PM on March 11, 2006

Yeah, I'm in the same camp as languagehat on this one. It sounds like this is a very financially well-adjusted kid. Whatever she is saving now will only be a drop in the bucket to what she can start putting away once she is working full-time. I'd suggest saving for more medium-term goals at this point -- the trip, a nice laptop for college, a car. Particularly the car -- having a decent, reliable car in college will make her life significantly easier and more fun, and will put her on a good financial road after graduation -- she won't have to go deeply in debt to get a car for commuting to her first job.
posted by Rock Steady at 9:52 PM on March 11, 2006

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