Teen spending ? when she has plenty of money

[disneysteve]

There are lots of articles and books about teaching your child to handle money, giving an allowance and making them budget to make what they have last, etc. What do you do, though, when your child gets to a point where she has a substantial sum of money, an amount that, to her at least, seems huge. You can't say, "Don't buy that comic book because you won't have money to go to the movies" because that just isn't true.

My daughter now has about $8,000 in her savings account. To a 13-year-old, that's a ton of money. Clearly, she could go to a movie every week for a year and then buy each one on DVD and barely put a dent in that account.

We're at a point where we need to get her focused on some bigger and longer term goals. I guess the main ones are college and a car (and all the related expenses) so that's somewhere to start. Any other thoughts from those who have been through it (or not) on the next step in the financial education process?

[red92s]

I have to ask: how much allowance is a 13 year old being given where they can amass $8k? I don't think the amounts I was being given for household chores could have even approached 25% of that. Not until I started working around 16 could I even consider saving in the 4 figure range.

[kork13]

Wow, $8k at 13? Shoot, that's alot of money for me now, at 22! lol

Anyway, as for something "bigger and longer term", I don't think that there really is anything that she needs to concern herself with right now. A car will likely run ~$5k for her (as a first car), and college... well, yea... that's a boatload more than she's got now, or even likely will have by the time she's 18.

I know that you have been very proactive in teaching your daughter about finances, so I know she's quite well situated in her understanding of things. My best possible recommendation would maybe be to start helping her understand how markets work. However, at 13, that may potentially even be too young to make teaching her about it worthwhile, just for how complex it is. I would say maybe once she gets a job somewhere (do you plan on letting her take a part-time job in high school?), you could start teaching her about retirement savings, leading her that way into understanding broader markets as well. Once she'd be working, she'd be a little older to grasp it better, and with a job, she could start saving small amounts into a Roth IRA.

What do you do, though, when your child gets to a point where she has a substantial sum of money, an amount that, to her at least, seems huge. You can't say, "Don't buy that comic book because you won't have money to go to the movies" because that just isn't true.

As for this, do it just as you've told me and others here... It's good to have some discretionary money, so long as it's a reasonable amount. Figure out with her what is, for her, reasonable. From what you've said of her, I doubt that keeping control of her spending (so long as she's in agreement with the amount) would not be a significant problem for her.

[srblanco7]

dont suppose you could talk her into opening a Roth IRA (assuming, of course, there's babysitting money in there)

[Seeker]

DS, all I can offer you is two links.

1) This one is a guide that can help you to sit down and set money goals with her:

FCIC - Helping Your Child Understand Money

2) This one is a 100-page downloadable guide titled "Money Math: Lessons for Life" ... and it's 9th from the bottom of the list.

Jump$tart Coalition - Download

[disneysteve]

We have talked about investing, so we do need to continue down that road. At the very least, we want to put some money into a CD to get better interest than the savings account is paying. She has donated some money to charity as well.

She can't start an IRA/Roth because none of this is earned income. It is all gift money from her Bat Mitzvah in September.

Just to be clear, she hasn't shown any signs that she plans to go out and blow all this money at the mall. I think we've taught her better than that. Its just that having this amount of money does naturally change the nature of the lessons and conversations that go on.

[pearlieq]

Is she allowed free access to the money?

I wouldn't think it to be unreasonable to restrict her use of the money. You could set aside a small portion for wants and make it clear that the rest is off limits until she's 18 unless it's for a mutually agreed upon purchase like a car, a special trip, or the like.

That would take the "But I can just get money out of my savings account" out of the equation when you discuss budgeting money.

[disneysteve]

Is she allowed free access to the money?

No, not really. I'm just thinking out loud here and thinking ahead. We haven't had any problem so far. It may never be a problem.

[jIM_Ohio]

Steps somewhere in the process-

Inflation
Volatility
Risk
overall value of a dollar

When I was growing up my personal inflation was negative. I wanted a stereo, bought it for $400 and a few years later a better model was $200 and a few years later a better model was $160.

Volatility is something which could be learned with 2 equal investments in a cd and an index fund. A person can learn the basics of dollar cost averaging and compounding easily, but few people really know about volatility until the market drops 40 percent in a few months.

Risk- things like inflation, currency and political risks should be discussed. Tax risks, timing risks...

[snafu]

I would guess that those gifting to celebrate her Bat Mitzvah likely intended funds to be applied to a future educational event. Can a major % be invested in her college saving fund or gap year travel fund?

[Johnstone]

Your child is a few years away from being more financial active and having access to her funds to buy with her own discretion. A 13 year old doesn't really have that much use for money, so there's not much to worry about. A few CDs and DVDs isn't going to amount to much compared to food expenses, concert tickets, going out with friends, etc. It's good that you're educating her and preparing her future financial welfare. At 20, I wish that my father taught me about investing 5 years ago. Market conditions aside, it would be nice to have 5 years of interest building so early in my time horizon.

$8000 is a lot of money for a savings account, so it would be wise to invest a significant portion of it. Perhaps set up a chequing account with 1k and have the rest in a long-term plan. At the same time, keep her aware of what is happening with her money and why it's important to use this money to help her for some future expenses. As she gets older be sure to give her the ability to feel in control of her finances and not simply directed by you. This will undoubtedly set her up favourably when the car and college expenses arise, and also enable her to be financially independent in the future.

[disneysteve]

Good posts, Jim and Johnstone.

snafu, she knows that she will be expected to pay some of her college costs. She also knows that we are saving for her education. It will be a joint effort.

[GREENBACK]

I would certainly look at showing her how difficult it is to earn and save that kind of money when she gets her first job. It may become self-apparent but if she can appreciate what it takes to save 8k( or even 1k) when their are few, if any, bills to pay it's bound to be a good life lesson on how much money that really is.

In this time of celebrities that routinely blow millions of dollars on garbage and it's plastered all over the media like they are playing with monopoly money, it makes 8k seem like a tiny amount. For the average worker raising a family it can be a significant amount of money to save.

[disneysteve]

I would certainly look at showing her how difficult it is to earn and save that kind of money when she gets her first job.

That's a really good point.

[Bernz]

I am actually in the same situation with you Steve, though my daughter is already 15 years old and she only has $2500 in savings account at the moment. One thing with my daughter though was that she is really not a spender, she loves to shop but pretty much under control as like I said she really do not like spending money. Not sure how much more will her money grow from here, but it's all about what we've done in the past which was educated her on the value of money and being a responsible teenager at the same time. We make it a point to her that if she need the money she can always ask us so she does not have to use up her own money. And guess what, she pretty much learned not to spend her own money even at times that she'd asked us for money and was declined.