Helping Aunt/Niece with financial education?

[DTEJD1997]

Hey all:

 

One of my nieces turned 18 a few months ago.  She is a wonderful young woman.  She has also graduated high school and is going to college in the Fall.  Of course, she is the daughter of my Aunt, also a wonderful woman.

 

Both of these women are SMART and HARDWORKING.  Unfortunately, they know almost nothing about finance.  They know what bank accounts are, how checking accounts and credit cards work...but very little beyond that.

 

I've been wanting to get them started with some financial education.  I was thinking of some introductory books, easy stuff, easy reading....maybe Peter Lynch?  HOWEVER, even this may a bit much to get started for them.  My niece has learned almost NOTHING in her schooling thus far about finance...not that I learned a lot, but I was taught what stocks/bonds/options were, how the stock market worked and so on by the time I was entering high school.  Of course, it was all just the most rudimentary overview, but I had some idea of what was what.  She has been taught/shown almost nothing...

 

She is 18 now, and if she learns about finance now, she'll have a big leg up in life.

 

So I'm trying to come up with 1 or 2 concepts for them to think about every time I see them.  I got started tonight with the concept of compound interest and the "rule of 72".

 

$1,000 to my niece is a lot of money, but not an impossible sum.  She just started working her first "real job" a few weeks ago.

 

I gave her the example of her investing $1,000 today, and if she could make 12% on it, how much she would have when she is my age.  Her eyes went wide when I did the math for her!  So that got her attention.  I then totally freaked her out by suggesting, what would happen if she could invest just $1,000 at the beginning of every year....how much would she have if she could make 12% AND do it every year....

 

I cheated a little by using 12% (a bit optimistic), as I wanted to get her attention, and get her thinking.  Her mother was also listening in, and she chimed in, "where/how can we do this?"....They were wondering if any bank paid this rate...so I had to come back and say you would have to own a business, part of a business, or perhaps own real estate.  It is difficult to do, but most certainly can be done if you are willing to work hard, have discipline, smarts, and a little bit of luck.

 

So we talked more about compound interest, and the rule of 72. 

 

I hope that gets the spark started in their minds.

 

I figure for the next time I see them, maybe talk about what a stock is, how they trade, and maybe leverage?

 

Then maybe after that, budgeting, paying yourself first, tax implications....

 

Then maybe some actual examples of good stuff/bad stuff?

 

Does anybody have any suggestions on concepts, books, or websites that will help get them on their journey?  I want the first few things to be very easy to conceptualize, and something that can be discussed/understood in 20-30 minutes.

 

 

[rb]

I'd say the first step would be to counsel her not to get into credit card debt. Credit cards target students big time. If she avoids making credit card mistakes she'll already be way ahead of her peers.

[Alekbaylee]

Viking has set up something to that tune I think: http://www.cornerofberkshireandfairfax.ca/forum/personal-finance/financial-literacy-for-teens-and-young-adults/

 

Agree with rb, credit cards should be avoided at all costs (pun intended)! :)

[bizaro86]

If she "gets" compound interest, the eyes wide at 12% returns moment is a good time to slide in "imagine how bad it is to pay 19%"  for credit card debt.

 

If you can get someone the motivation to save a reasonable percentage of their income at a young age, that alone will put them way ahead.

[Spekulatius]

I agree on starting with credit card debt. It seems strange, but a lot of Americans don’t get the concept of “interest rates”, they think in terms of payments and if they can afford it. I would probably start there and explain what interest rate compounding really means.

 

We all know that compounding interest is important to accumulate wealth, but the inversion of this is high interest rate debt (mostly CC debt), so it is an important pitfall to avoid.

[Viking]

I ran a fianancial literacy club at my kids high school last year; we did 10 sessions and it went quite well. Most importantly, I learned a great deal about how to teach to teenagers.

 

You might find some of the material on my web site useful (it is oriented to Canada). I initially called the club the Money Club but was asked by the school to change the name to Financial Literacy Club (a parent complained). www.wgssflc.ca

 

I will be running version 2 of the Club In the fall and will be making lots of changes to the web site (especially the information on investing). The changes will be coming later in August.

 

A great Utube station to look at is the Financial Diet; two young women, one was a fianancial train wreck and the other was very good. Lots of good videos on credit cards (and how easy it is to get messed up).

 

Let me know if you have any other material, web sites etc that you think are especially good for teenagers. :-)

[cubsfan]

Viking - that's a really great little website - thanks for posting.

[rogermunibond]

https://www.amazon.com/Early-Bird-Power-Investing-Young/dp/1973235439

 

Pretty good book on investing written by a young woman.

[Saluki]

I like "The Only Investing Guide You'll Ever Need" by Andrew Tobias.  It has a lot of practical advice (If wine is on sale at 1/2 off, and you buy a year's worth that's a great investment because there is no stock that's guaranteed to give you a 50% return in a year, but being frugal does guarantee that) and some great explanations about different financial products and how they work. FYI, Astrid buys coke for Warren by the case when it's on sale!

 

I saw the ridiculous title and flipped to the index to decide if it was worth a read.  I saw that futures and options were a page and a half and I wondered how someone could explain derivatives that briefly so I thumbed to the pages in question. It explained briefly what they were and how they work, then said (paraphrasing) "now that you know what they are and how they work, you should never invest in them."  The perfect answer!  I bought a copy.

[BG2008]

Since no one mentioned this, I thought that "Rich Dad Poor Dad" was a good book even for me in my 20s.  Yes, the guy made up stories.  Munger said that even bad people can say some really helpful things.  The author really stressed the concept of assets and owning them.  He goes into the concept of owning your own home and how one can get into trouble thinking you own an asset when you really have a liability. 

[ScottHall]

If reason doesn't work, try emotion.

[Spekulatius]

If reason doesn't work, try emotion.

 

Speaking of emotion, at some point, the impact of any future significant other should be pointed out. even if your niece is financially literate and smart, it does not mean anything, if the signifant other is just the opposite.

 

Then there is the issue with wedding expenses,  if it comes to that. They tend to be in the same ballpark than a 20% down payment for a house in the US. That’s a huge opportunity cost if you can only do one of the above. I think it is important to point this out.

 

You niece will probably roll her eyes right there.

[SharperDingaan]

The smartest thing you can do is get out of the way.

Pay for them to see a female financial advisor and a female 'life-coach', preferably one whose client base is primarily business women, divorcees, and mistresses/madams.

 

The sexist reality is that a womens looks and fertility are a wasting asset, that she needs to maximize the value of.

And the porfolio management skills required are way beyond what is being discussed here.

 

There are some funny sides.

You will periodically find out how stunningly prudish you are! which will impact your sex life.

 

SD