Ten of the best … money tips for teenagers

Source: http://www.theguardian.com/money/2007/nov/22/personalfinancenews

Ten of the best … money tips for teenagers
Money is a passport to an easier and more comfortable life, says Jonathan Self, so it pays to learn how to deal with it. Here are 10 tips from his book The Teenager’s Guide to Money

1.The sooner you start managing your money, the richer you’ll be

When you are young it is quite tempting to think there is no rush to manage your money; it is easy to imagine that you have plenty of time. But the longer you leave it the more difficult it will be. Suppose you want to have savings of £10,000 on your 30th birthday:

You could save 78p a day from the age of 13
You could save £4.47 a day from the age of 25
You could save £27 a day from the age of 29

Every day counts when it comes to making the most of your money, and it is never too early to begin.

2. It isn’t just about money

Shopping well isn’t just about saving your money; it is about saving your time. Suppose, for example, that you earn £3 an hour looking after your neighbour’s children. If you spend £15 on a CD in a record shop when you could have brought the same CD in a supermarket for £9, then you aren’t just wasting £6. You are wasting two hours of your time (two hours at £3 an hour = £6). Time you might prefer to spend doing something else.

3. What is capital? What is income?

One of the most important money concepts is to understand the difference between “capital” and “income”. Capital is something – it could be money, a property, shares or some other investment – that generates an income for whoever owns it.

A good way to remember the difference is to think of a fruit tree. The tree itself is the “capital”. The fruit is produces is the “income”. You continue to own the tree (capital) and it continues to bear fruit (income) every year. Your wage or salary is the income that comes from the capital of your labour – hence the expression “human capital”. Money is not just money – it is either capital or income.

4. If in doubt, just say no

Credit cards
Credit cards are an expensive way to borrow money. Photograph: Ian McKinnell/Getty
The big risk with a credit card is that you will run up large debts that you have no way of paying off. If you need to borrow money, there are much cheaper ways to do it. And if you don’t want to carry cash when you go shopping, use a debit card. Don’t let the banks fool you into taking a credit card out. Unless you have a real need, just say no.

5. When you borrow, you are kissing goodbye to “future” income

When you borrow, what you are doing is giving away some or all of your future income. Let’s say you borrow £250 at 12% interest and repay it over 36 months. What you are giving the lender is £9.44 of your monthly income for the next three years. What you are paying for this privilege is a grand total of £90 in interest.

6. Don’t get caught in the minimum-payment trap

Lenders want you to repay them. Wrong. The last thing most lenders want is for you to pay back the money you owe them. Why would they, when they can make massive profits at your expense? This is why lenders frequently set very low minimum monthly payments. By making sure that most of what you repay them is interest (and not the debt itself), they can prolong the agony for you and increase the profits for themselves. Nothing makes lenders so happy as a customer who falls into the minimum-payment trap.

7. The language lenders use to make you feel special

Lenders use language to great effect to make borrowers borrow more. To begin with, they flatter their customers by telling them that they have been “specially selected” or are in some other way honoured to be offered a particular loan. Then they play down the expense of the loan with expressions such as “low cost” and “value for money”. Finally, they focus not on the interest rate or term but on the monthly payments, which they will describe as being “easy” and “convenient”.

8. You control the risk

Horse racing
Not the best way to invest your money. Photograph: Action Images/Matthew Childs
One of the first questions every investor has to ask him- or herself is: how much risk am I willing to take? In general, the more cautious you are, the less reward (or profit) you can expect. Whereas, if you are willing to take a greater risk, you will be in with the chance of a much higher reward.

A bank deposit account is not at all risky. But your reward will only be a small amount of interest every year. Gambling on a horse, on the other hand, is very risky. If it loses the race, you lose all you money. But if it wins, you could make a huge profit.

9. Insurance doesn’t provide total cover

It would be very rare for anyone making a claim on their insurance to receive every penny they ask for. This is because most policies have something called an “excess”. This is an amount of money that the insurance company expects you to pay if there is a claim. Suppose your excess is £100. If you put in a successful claim for £500 of damage, you will get £400 – that’s £500 less the £100 excess. The bigger the excess, the less expensive the insurance.

You should also be aware that an insurance company’s idea of what a car is worth and your own may differ. If you make a claim, expect at best to receive the car’s “market value”, which is the same as its second-hand value. If you want to insure your car for what you paid for it (a good idea if you’ve borrowed money to buy it), you can take out something called guaranteed asset protection (Gap) insurance.

10. Don’t be an ostrich

If you want to build up enough wealth to make sure you can give up work at a reasonable age and never have to worry about money, then don’t forget about pension planning. And in particular, don’t act like an ostrich when it comes to the pensions crisis. To guarantee yourself a comfortable retirement you need to start planning early.