Cash Flow for Teen Tycoons

Hard lessons in fiscal fitness

Some parents complain that their teenagers won't work. Others face the opposite problem: Their money-minded kids become wildly successful at baby-sitting or lawn mowing. In a matter of months, these small-time entrepreneurs have the cash to become big-time spenders. No longer dependent on the Bank of Mom & Dad, they're off to the mall, the video-game store, or the 7-Eleven to treat their pals to a round of Slurpees.

How do parents turn down the cash outflow when they no longer control the faucet? Teaching kids to manage money is never easy. And teen tycoons are at risk for what researchers call "premature affluence"--all the privileges of ready cash with none of the regular expenses. With no rent to pay and with no groceries to buy, my 14-year-old son, Elliott, sees nothing wrong with dropping $70 of leaf-raking cash on a subscription to a British aviation magazine. Since time-pressed neighbors will pay $35 a lawn or $10 an hour for baby-sitting, the sums involved can be large. And with real adult responsibilities just a few years away, you don't have much time to teach your well-heeled child save-aholic habits.

SILENT TREATMENT. The first thing to remember: "The kids are right: It is their money," says Jayne A. Pearl, author of Kids and Money: Giving Them the Savvy to Succeed Financially (Bloomberg Press, 1999). But even the most entrepreneurial kids depend on parents to instill good fiscal habits. A survey of 12-to-17-year-olds by the GE Center for Financial Learning in Richmond, Va., found that 71% of kids say they learn about money from their parents--even though 47% say they seldom or never discuss the issue. If you're among the silent near-majority, it's time for The Talk--not the one about sex, but about the financial facts of life. The Talk should cover the teenager's financial goals, why it's important to save, and how to be a smart consumer.

Especially when teens are earning their own cash, your job is to help. "Set goals--don't legislate," says Pearl. Maybe your 14-year-old dreams of buying his own car in two years. Don't just say: "You can't afford that." Instead, ask: "So how much would you have to save, at what percent interest, to get the Maserati you have in mind?"

Most planning focuses on a scheme for dividing the young workers' funds into immediate spending, short-term goals, and long-term saving. Some parents advocate allocating 40% for near-term goals, 25% to routine expenses, 10% to church or charities, and 25% to long-term savings. Short-term savings are crucial because they yield the rewards--a trip during spring break or an MP3 player--that make all that baby-sitting worth the effort. "Just be sure there's a pause between the income and the outgo," says Kate Kelly, mother of three girls and author of The Complete Idiot's Guide to Parenting a Teenager (Alpha Books, 1996).

To teach that earnings bring responsibilities, figure out how your child's income and allowance fit with expenses. Perhaps your teen can take over paying for entertainment, school lunches, or clothes. Many parents give an annual back-to-school clothing allowance of, say, $150 to cover everything except coats or shoes. The next Guess T-shirt comes out of her own pocket.

What if your teen's choices make you cringe? If the purchase isn't immoral, illegal, or too objectionable, bite your tongue. Even small purchases can be learning experiences. Karen Stewart of University City, Mo., said nothing when her 14-year-old, Shelley--earned by baby-sitting and dealing in Beanie Babies--insisted on spending her money on a full-price hardback copy of the recent sequel to the teen hit book Angus, Thongs, and Full-Frontal Snogging. But when Shelley lost interest and wanted to return the book the next day, Stewart said no. "You have to make sure the consequences are their consequences," she says.

Some consequences you can't avoid. When your hard-working teen is socking away $1,000 or more in a summer, how he saves can affect your taxes and college aid. Once the cash overflows the piggy bank, you have to decide whether to save in your child's name through a custodial account, or create an account in your name. Most parents use custodial accounts because interest earned by a teen suffers a smaller tax bite.

PENALTY. But that tack can put college aid at risk. Under the federal college-aid formula, if your child has $1,000 saved in her name, she'll be required to contribute $350 of it toward her freshman-year expenses--and her aid will be cut by $350. The same $1,000 in your name reduces aid by only $56. The tension between giving her the responsibility of saving and maximizing financial aid prospects "does present a perplexing problem," says Judy Miller, a certified financial planner at College Solutions in Alameda, Calif. If you and your teen decide it's best to save in your name, then put the money in a separate account and have her do the bookkeeping.

Admittedly, saving for anything more than six months away offers about as much appeal to a 14-year-old as orthopedic shoes. "Deferred gratification is probably the hardest thing to teach," says Nicki Campbell, the mother of three teens in Columbus, Ohio. Campbell offers a sweetener: a 50% match, which her teens call "the 401(k)," for funds put in long-term savings.

Or you can try to replace the fun of spending with the thrill of investing. When his parents encouraged Michael Stahl, then a fourth-grader in Leawood, Kan., to invest a small gift of money in the company of his choice, his Atari stock quintupled in three months. Now 19 and the author of Early to Rise: A Young Adult's Guide to Investing (Silver Lake Publishing, 2000), Stahl advises teens to invest in stocks they can relate to--such as his stake in AMC Entertainment, a theater chain based in Kansas City, Mo.

Of course, investing's thrills can turn into chills. Danny Tobias, now 19, plowed his camp-counselor and busboy earnings into a global mutual fund and enjoyed two years of great returns--until global stocks sank. The losses were painful, but Danny's father, Benjamin Tobias, president of Tobias Financial Advisors in Plantation, Fla., figures they were a small price to pay for "a great lesson" about why you have to invest for the long term. After all, Danny has still got most of his principal--and a strong base, both financial and emotional, for mature affluence in the years ahead.

By Karla Taylor

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