how to explain to a hard headed 18 year old

[irmanator]

that it is in her best interest to sign up for 401k even though everyone at her job is complaining about what they are loseing? I have tried everything i can think of but she is not listening because, you know mom is stupid and her young friends are so much smarter.

[kork13]

would she be open to reading a finance book? pick the right one and it could help change her thoughts. Who else might she listen to about finances? other parent, friend, sibling, any other assorted relative, co-worker, or whoever.... someone whose perspective she would trust.

For me, when I was 20, my supervisor at work offered to introduce some personal finance stuff to myself and a bunch of others that I worked with. I trusted his advice as someone with alot more experience than I, and within the week had started a Roth for myself.

[jIM_Ohio]

Send her here- I can set her straight.

What is her income and expected 2009 wage? Is there a match?

[MoneyTrev]

Follow the advice of kork13.

Get them to read about finance. Robert Kiyosaki is against opening 401(K) though.

[DebbieL]

Well, I'm personally out of the market for now. I think it is going to keep getting worse (with some upswings, but generally worse) for some time yet, and I won't be getting back in until I think the economic situation is much better. I wouldn't want to be losing my money either. I am keeping my RRSP in escalator GICs for now. Do 401K's have to be invested in the market, or can they hold things like money market accounts? Here in Canada, your RRSP can hold anything.

[maat55]

Originally Posted by MoneyTrev

Follow the advice of kork13.

Get them to read about finance. Robert Kiyosaki is against opening 401(K) though.

I hope you don't follow Kiyosaki's advice on everything.

[disneysteve]

Originally Posted by irmanator

that it is in her best interest to sign up for 401k even though everyone at her job is complaining about what they are loseing

Normally, I'd recommend that someone that age be very aggressive, but in this case, I'll make an exception. For an 18-year-old, it really won't matter in the long-run.

Tell her to start contributing to the 401k but put the money into the fixed-income option. She is guaranteed not to lose money. She will earn whatever interest rate is being paid plus get the matching funds. If she can't be bothered investing in something with a 53% or higher return, she's hopeless (for now, at least).

Once the market straightens out and starts going back up, you can hopefully get her to start moving some money into equities. She'll likely miss a big chunk of the recovery, but so what. She's only 18. The most important thing right now is to get her doing it.

[cicy33]

While I personally have decided to forego the 401k thing as well for now, the actual question is how to convince an 18 year old. Try to remember when you were 18. Nothing you say is going to convince her or him unless they want to. You can only provide the options, the facts and let them make their choices. I have a 23 year old so I can recently relate to the convincing them of anything. At this age, we know nothing. pretty soon we will know stuff again. and like it or not, 18 is the age of consent, the choice is hers. Just like all other decisions we try so hard to convince our children of. We as parents can only do our best and offer all options and then hope and pray they do okay. I think that at this point she might be better off to put the money into a savings account that is earning 4 or 5%. Might be safer at this point. I agree with DebbieL it is going to get worse for awhile. Try to think of this way. This is her first experience with serious saving for retirement. She invests for 1 year and during that first year loses half her money. That is going to give her a really bad taste for it. perhaps it would be best she steer into a different area and then revisit it next year. perhaps it will be stronger by then. I have a friend whose mother has quite a bit of money tied up in the stock market due to her husband passing. Since this began, she has lost 1/2 her money or 100,000. it didn't take very long. Granted she had a larger amount to lose than some so it looks even worse but still how terrible. I noticed less than a year ago this was getting bad at my last job and that was before it really tanked. my 401K at that job lost everything my employer had matched for two years. The only thing left after the end of two years was what i had put in. No extra interest, nothing. I am very cynical now. and I am not 18. I could have done that on my own!

[maat55]

Tell her she is trading 50 cents for a dollar.

[disneysteve]

Originally Posted by cicy33

I think that at this point she might be better off to put the money into a savings account that is earning 4 or 5%. Might be safer at this point. I agree with DebbieL it is going to get worse for awhile. Try to think of this way. This is her first experience with serious saving for retirement. She invests for 1 year and during that first year loses half her money. That is going to give her a really bad taste for it.

Exactly why I suggested she open the 401k but use the fixed income option or money market fund. She'll definitely see growth and get the match.

[cicy33]

MAAT55,
but isn't that not true right now? How do you explain to a teenager that if she is patient the market MIGHT get better and give her more money than she put in. There is no guarantee right? I have heard for awhile now that the market will get better and yet I keep hearing the words, and the numbers dropped again today. I personally am concerned as well. By no means do I have an issue with anyone who has a 401K, I just don't think it is for me. Basically the stock market is a gamble.

Disney == I see where you are going with what you are telling her. Is that an area that is safe? or can it lose money too?

[cptacek]

I agree with DisneySteve. Most people think 401(k) = stocks. Surely the 401k has a money market account in there, like earning 1.5% or so. Show her how if she invests $100 and the company matches it, there is all of a sudden $200 in her account and less than $100 taken from her check (because of taxes).

If immediately more than doubling her money doesn't convince her, nothing will right now. You'll have to wait for a bull market and then she'll be in for sure!

[disneysteve]

Originally Posted by cicy33

Disney == I see where you are going with what you are telling her. Is that an area that is safe? or can it lose money too?

Any 401k should have a safe option, a money market fund or something similar. And if there is a 50% match, she can't lose. Put in $1, save $.25 on taxes and get $.50 for free. Even an 18-year-old should be able to understand that.

Of course, I have a 13-year-old who was asking me the other day what she needs to do to open a retirement account. I think she asked that after we finished watching the Suze Orman show together. Somehow, I suspect I won't have this issue with her when she is 18.

[cicy33]

Also, keep in mind as I said before. The problem is actually that she is trying to make her own choice and it isn't matching yours so she is resisting any advice that you give her. typical teenager. But she can always change her mind in a year and go with that option. Sure she would lose a year but I was almost 40 before I even had the option of a 401K. Not all jobs have them. My checking account earns 5% interest. That is a better investment for me right now. Of course keep in mind that I do not understand a 401k at all. I have tried reading online about it but it is not very helpful. My basic understanding is that you are buying stocks.

[jIM_Ohio]

I would givwe two examples. One is compounding and one is taxes.

Two people, both age 18 are presented with choices. Person A contributes $5000 per year to 401k and gets a $2500 match, Person B waits 10 years and does the same for 20 years.

At age 48, which one has more money? Person A which invested $50,000 and had it invested for 30 years, or Person B which invested $100,000 for 20 years.

Answer- it's not even close. Person A will have DOUBLE what p[erson B does with investing 50% less. I have a spreadsheet I can plug numbers in, but not on this PC.

Taxes- sane situation, I would point out that a salary of 25k investing $5000 pre-tax saves around $750 in taxes now, so it's only about $190 being lost per month, maybe $150 depending on state.

[disneysteve]

Originally Posted by cicy33

I do not understand a 401k at all. I have tried reading online about it but it is not very helpful. My basic understanding is that you are buying stocks.

Not at all. I like to use the analogy that a 401k or an IRA or Roth is just a basket. What you put into the basket can vary quite a bit. With an IRA/Roth, the choices are virtually unlimited. With a 401k, the options are limited to what the company chooses to offer, but there are generally the same types of things - a money market, a variety of stock funds (large, mid, small companies, domestic and foreign), bond funds, maybe target-date retirement funds, perhaps a real estate fund and/or other sector funds (gold, commodities, etc.) and probably company stock. You get to pick how your contributions get divided and which investments you put in your basket. You can be very aggressive, very conservative or somewhere in between.

I'd suggest OP try to get her daughter to start small and ultra-conservative. Sign up for a small contribution, even if it isn't enough to get the full match, just to have her get her feet wet. Although she would benefit greatly from going in full force and being aggressive, she isn't ready for that. Let her put 2 or 3% of her salary in for now to see how it works and see how it grows. Baby steps. If she does that, you can talk to her about gradually upping her contribution, maybe when she gets her first raise. She's young.

[jIM_Ohio]

I would not steer someone towards cash based investments just to get them started, TQM- totak quality management- when you do something do it right. BUY LOW. I might have them invest 25% into equities and 75% into cash, making sure the equity fund paid dividends, then comparing returns over short time periods (3 mo/1 yr/3 yr) to show how investing works. You don't learn anything on the sidelines.

after 3 months do 50-50 and go from there with asset allocation learning.

[maat55]

Originally Posted by cicy33

MAAT55,
but isn't that not true right now? How do you explain to a teenager that if she is patient the market MIGHT get better and give her more money than she put in. There is no guarantee right? I have heard for awhile now that the market will get better and yet I keep hearing the words, and the numbers dropped again today. I personally am concerned as well. By no means do I have an issue with anyone who has a 401K, I just don't think it is for me. Basically the stock market is a gamble.

Disney == I see where you are going with what you are telling her. Is that an area that is safe? or can it lose money too?

I would hope that the company investment choices include a MMA or cash equivalent. I get where your coming from, we just have to have faith that normality will return.

[whitestripe]

well, i am really sorry because i am not going to be any help for what you want lol. i am 21, and i live in australia. even though the government contributes $1.50 for every dollar that you put into superannuation, i will not be putting any money in this year.
why would you put money in with the amount of risk there is in the market right now? i just don't see the point.
superannuation is going down the toilet. in my opinion i feel safer putting money in a savings account. the money is there, and it's mine. it won't disappear. when the financial market is stronger and rates are on the increase, THEN you might want to argue with your 18 year old again.

[cptacek]

Originally Posted by whitestripe

well, i am really sorry because i am not going to be any help for what you want lol. i am 21, and i live in australia. even though the government contributes $1.50 for every dollar that you put into superannuation, i will not be putting any money in this year.
why would you put money in with the amount of risk there is in the market right now? i just don't see the point.
superannuation is going down the toilet. in my opinion i feel safer putting money in a savings account. the money is there, and it's mine. it won't disappear. when the financial market is stronger and rates are on the increase, THEN you might want to argue with your 18 year old again.

So you put in $1 and the government puts in $1.50. You put in $1 and you end up with $2.50. You get an immediate 150% return on your money!!! Where else can you get that? You would rather get a guaranteed 3% in a savings account vs a GUARANTEED 150%?

Are you sure that there isn't a money market account or a "savings account" that can be categorized as superannuation so you can get that $1.50 match? There has to be some way to put money in a "holding area" so you can buy stocks at a later date...so just put the money in this "holding area" until you are comfortable with buying back in!