How To Talk To A Teen About Money

One of my clients told me the other day about a conversation she had recently with her teen. The conversation began as a typical mother-daughter talk about a purchase and had every chance of devolving into an equally typical argument. But suddenly, my client decided to take the conversation in a different direction—into the sort of conversation she would normally have with me, her financial advisor. She was surprised at the results. Most of us don't talk to our older children about money because we don't want to share worries and anxieties or because we've been trained to keep the information "private." But very few of us live without financial limits. What we do within those limitations—the planning, the discipline and the constant adjusting for unexpected costs and opportunities that crop up in our lives—these are exactly what a young person in our society needs to understand. Next time you get a chance to mentor a young person about finances, resist the urge to hide the realities that you've been managing (whether skillfully or not), and try sharing your own experiences:

Don't be afraid to share how much you make

We train ourselves to hide how much we make, and most of us have suffered at one time or another from our resulting ignorance of how others in our community are faring. Besides, you might not be impressed by your modest income, but the teen who counts out spending cash one bag of chips at a time probably is. Enjoy the rare moment of respect when you tell them that you make more than a three-figure salary.

Show them the real costs of life

You build your choices around some pretty heft and inescapable costs—housing, health care, transportation, groceries and taxes just to get started. When you share these figures with a teen, you are often giving them their first real look at the baseline for getting by as an adult in our society. This is also a good moment to reflect on how much you ask of yourself as a breadwinner.

Have a dialogue about the choices

Our choices are where we become who we are. Every day we decide what is important to us: because that expense makes us healthier or saves us time we badly need elsewhere, because we are afraid of what might happen, because we believe in something outside ourselves. We make financial choices because we dream of changing our lives some day or just because that little expense makes us happier. None of these choices are things to be ashamed of, even when we aren't completely sure those choices are the right ones.

And this, I think, gets at the root of why we are so reluctant to talk to our teens about these things. As a society, we have been floundering along under the assumption that we should be better at managing our money than we are. Money has a way of squirming its way into every worry and challenge we face in life. And yet, the vast majority of us somehow find a way to get through. We probably all need to give ourselves a bit of break. We definitely all need to talk about it more—not just for our teens' sake, but as a reminder that every day, no matter how many unexpected obstacles crop up, we are there figuring out a way to make things work all over again.

What They Never Put In the Financial Marketing Materials

Lately, I have had a lot of questions from people who are feeling ready to do something with their finances. Sometimes it's a matter of making your way out of a difficult financial situation (recovering from illness or unemployment, finishing a degree, paying off a debt, etc...), but often it's just a sense that you've been just wandering along without any particular plan or purpose. Thanks to a flood of shiny ad campaigns from the big brokerage houses, people often think this boils down to opening a retirement account somewhere. Here is what I tell people to think about before you go shoving all your money into an IRA.

Retirement Accounts are Great...But Not If You Need Money Now

The reason personal finances is so hard is that it demands that we think near-term, mid-term and long-term pretty much all at once. Like any financial advisor, I love getting my clients on track for the post-65 years. But dreams of a cushy retirement are only moderately comforting if you unexpectedly have to replace your car next week. Worse yet, if you do have to reach into your retirement account for an emergency, you will probably pay a penalty 10% of your hard-saved earnings for the privilege of getting your money back. All of those well-advertised retirement accounts (401k, IRA, Roth, Pensions, etc...) are great vehicles for the long-term. And unless you have reached your 60's, they are pretty useless for dealing with life as it is right now. Put the retirement account on the list, but not at the top. Instead—start with your emergency fund.

Life is Poetry, Budgets Are Fiction: Why You Need An Emergency Fund

How many times has someone told you that all you need to do is create a budget and stick to it? The advice usually comes with an ugly but orderly spreadsheet and a sort of smug assurance that all you need to do is follow the numbers. But experienced advisors are usually happy to admit it—budgeting doesn't work. The reason of this is simple, really. You don't live in a spreadsheet.

It isn't just that people have emotions and stressors that flicker through their thinking, changing their decision-making moment by moment. We all know what it's like to leave the house with one plan for the day only to have chucked the whole thing out the window by lunchtime. The problem is that even if we stick to the plan, the world won't necessarily cooperate.

Budgets depend on the illusion that we can forecast the future, so they don't tend to leave room for broken tail lights and dry cleaner emergencies, much less emergency room visits and sudden layoffs. You can't control these things, and you can't plan for them, but you can create an emergency fund that will soften the blow. And this is the crucial part of thinking short-term—emergencies can happen next week or next month or even tomorrow. Make sure to start (but not necessarily finish) your emergency plan before you start on the long-term thinking.

Saving is Simple. Leaving the Money Alone? Not So Much

As every Top 10 Financial Tip list will tell you, you should auto-deposit part of your check every month into a savings account. But those lists often fail to mention what the savings is for. Creating an emergency fund and saving for a big purchase are very different things. In fact, you are almost always better off to use separate accounts for them. Let's call this second account the "Occasion Fund."  You use it to build up money for the big occasional spend (wedding, new place, the big birthday party...). Discount the need for these things at your own peril. Sure you can survive without them, but survival is not our goal here, and life demands some celebrations.

Unless you possess superhuman discipline, you will find yourself reaching for a just a little extra money from somewhere when they come up. It's better to have these moment in your plans. A word of caution, though—unless you are far wealthier than I, that fund won't cover every event you could turn into an occasion. This fund is all about mid-term thinking. Before spending out of this account look a little further into the future to decide which of the upcoming events in life most merit the spend.

Life Doesn't Work Step By Step

In the orderly world of planning, we want to tell you to do all these steps in order: first put aside 3-6 months expenses for the emergency fund, then start the long-term retirement planning, and then the occasion fund. But the truth is, this is rarely realistic. You do need to start putting money in for emergencies first. But it won't be long before that opportunity for a weekend away comes up. So, don't fight it. Split your automatic savings between the emergency account and the occasion account. Sure, it will take you a little longer to meet your goal in both accounts. But life, unlike financial plans, is about a lot more than the end goals.

And remember what I said about that Budget spreadsheet? I can't tell you when or why, but some day you are going to spend down one or both of those accounts. Stuff happens. Having charge of your finances means being knowing you have the know-how to build it all back up again.

Getting A Head Start: Tips For Before You Start That New Job

I spend most of my time helping people with investments, but you can't get around the fact that your job is likely the most important part of your financial plan. There are simple things you can do at the very start of a new job that can impact your pay, benefits and working conditions for the rest of your time with your new employer. In fact some studies show that starting off with less pay in that first job could mean less earnings long after you've moved on. If you are on the job market, have an offer on the table or about to start a search, this short series of posts will give you the key points for getting the most, in salary and benefits, out of your new job. Follow along and send in your questions!

1. The Five Biggest Do's and Don'ts of Negotiating

2. Making the Most of Your Retirement Plan

3. Making the Most of Your Health Insurance Plan

4. Protecting Yourself from Employment Risks

And use the comments to send questions or suggestions you want to share.

Why Too Much Trading Can Cost You

With all of the effort you put into managing your investment account when you are getting started, it's worth reminding yourself why trading too much can eat into your returns:

1. Trading almost always caries some kind of cost. Depending on what you are trading and where you have your account, you may pay a transaction fee for selling one investment and another fee for buying the new investment in its place. These fees aren't huge, but they can add up over time.

2. You could be increasing your taxes. If you are in a tax-deferred account—a 401k, Roth or IRA, for instance—this won't be a problem for you. In those instances taxes get calculated only when you withdraw the money. But if you have a regular, non tax-deferred investment account, the profit goes on your tax bill every time you make a trade. Worse yet, if you have not owned that stock or fund for more than a year, you are going to pay the higher short-term capital gains tax. Of course, taxes are not a problem if you have lost money on your investment, but that's a different issue, isn't it?

3. Studies consistently show that frequent traders do worse. This is really a human psychology problem—there is no obvious reason beyond those I've just listed for why someone who frequently buys and sells should do worse in the market. But our human tendency to second-guess ourselves, listen to "experts" and rumors, and impulsively stray from our original plans means that frequent trading can easily cut into returns. To see more on this, check out Terrence Odean's Do Investors Trade Too Much, Odean's interview with the American Association of Individual Investors, or John Teall's book Financial Trading and Investing (Academic Press, 2013).