As Alice Cooper so famously sang when I was 18, "School's out!" Many young people will be working for the summer, some for the first time, and they have a unique opportunity to start the saving and financial planning habits that will allow them to reach their financial goals, including achieving financial independence at an early age.
It's never too early to start and, in fact, the teen or preteen years are the perfect time.
The basic "secrets" to financial success are:
-- Outline clear, measurable goals based on your most desired objectives and dreams;
-- Pay yourself first, by putting the money needed to reach those goals aside before spending on anything else; and,
-- Learn what money has to do to help you reach those goals and the rules around making it grow most effectively.
Some of the knowledge surrounding secret No. 3 can wait until a bit of money is accumulated. Developing that knowledge will also continue over the coming decades. (I know I'm still learning.)
However, the critical immediate task is setting clear savings targets for both short- and long-term goals, and carving off a set percentage of every paycheque (or share of tips) to go toward those goals.
When I was 15, I worked the entire summer to pay for my new Fender bass guitar. My mother had been kind enough to lend me the purchase price, but my commitment was to pay the loan back in full by the end of August.
I worked 40 hours a week as a tractor mechanic's assistant, being paid the grand sum of $1 an hour. That's right, $40 a week, and hard work with a tough boss, my uncle Conrad.
It's no wonder I chose to earn my keep as a musician through high school and university.
I will really sound like an old fuddy-duddy here when I say a lot of kids these days are deprived of the learning experience that comes from having to wait for gratification -- and the joy that comes from having to work for what they get. As a parent, I'm as guilty as anyone. However, I don't think we do the kids any favours by providing everything.
The best thing we can do as parents (or grandparents) is to spend extended time with the kids and help them dream about the important things they want -- big things such as education, careers, travel and the life they want to develop. (Such conversations will usually start off with the latest electronic gadget they want, so be patient.)
The next step is helping them quantify the money needed to reach those goals and then developing a specific plan based on their resources or capabilities to put that money aside.
Hopefully, some of those goals and dreams will be big enough to be unattainable in the short term, making it even more important to be specific about the first steps, the long-term plan and especially the milestones along the way against which success will be measured. A big part of the plan has to be renewing the motivation to keep it going, even when faced with obstacles or delays.
The big long-term goals are the hardest to keep focused on, but they're by far the most important ones.
Young people have a huge opportunity to use the power of compound growth to help them reach their goals. Here's an example:
Ellen starts saving at age 18 and puts away $100 a month into equity mutual funds. She averages a 10 per cent annual return. At age 30, after 12 years, she stops saving and just lets the money grow on its own.
Bob starts saving $100 a month at age 30, and continues until age 65, a total of 35 years. Who has more money in the end? You guessed it: Ellen.
And yes, a 10 per cent return will be achievable in the future as the economies gradually recover. The magic of investing regularly is that you automatically buy more shares when the market is down, giving you a better average price. So start saving early.
Give yourself every advantage. I hate to admit this, but the mirror tells me you're only young once.
David Christianson is a fee-for-service financial planner with Wellington West Total Wealth Management Inc., a portfolio manager (restricted).