Each generation of teens has faced its own particular challenges. For “Generation Y” or “Echo Boomers”–those born in the late 1970s and after–personal finance issues are particularly complex and challenging, and as different from the money-related experiences of previous generations of teens as an old 45 differs from a CD.
Kids are earning more, spending more and using more types of financial tools, such as debit cards and credit cards.
Here is a look at some trends in teen finance, and what advice experts have for parents:
– Teens (defined as aged 12 to 19 for marketing purposes) spent an average of $84 per week of their own money in 1998, up 16 percent from the previous year, according to research from Teenage Research Unlimited, a Northbrook firm.
Teens get most of their pocket money from their parents, says Michael Wood, vice president of Teenage Research, either as outright spending money or as compensation for helping around the house. “For the most part, the economy is doing well, and parents are doing well,” notes Wood.
Another big source of discretionary income comes from earnings from part-time jobs. According to the U.S. Bureau of Labor Statistics, the unemployment rate among 16- to 24-year-olds was 10.1 percent during this past July, a peak time for teens to work.
Moreover, another recent survey by the Bureau of Labor Statistics finds that more than half of 14-year-olds participate in some type of work, including “freelance” jobs such as babysitting, and nearly two-thirds work at some point while age 15.
For the most part, says Wood, that $84 a week is disposable income that teens spend on what they want: entertainment, music, candy. But some of the spending is on necessities, such as meals away from home. Parents are giving teens much more independence, says Wood, allowing them to pick up meals and items they need on their own.
In addition to their own money, teens spend a portion of the household grocery budget. “Half of teen girls and about one-third of boys do fill-in grocery shopping during the week,” says Wood. As soon as teens earn a driver’s license, time-pressed parents are increasingly relying on their help to pick up milk and other groceries.
Expert advice: “Whenever you’re with your teen or child in a store, don’t just do comparison shopping in your head,” advises Dara Duguay, executive director of the Jumpstart Coalition for Personal Financial Literacy, a non-profit organization based in Washington, D.C. “Tell your kids what you’re thinking about, how you’re looking at prices and comparing values.”
– Credit card companies will try to persuade a teen to own a credit card by the time he or she is 18.
Legally, explains Duguay, anyone under age 18 can’t obtain a credit card in his own name. If for some reason he does, he’s not legally liable for the bills he racks up. (Kids under age do sometimes get their own cards, if they lie on an application, says Duguay.)
As soon as a teen graduates from high school, which usually happens sometime near his 18th birthday, he’s likely to be barraged by credit card offers in the mail, says Dennis Meunier, vice president of United College Marketing Services, an Oak Brook firm that conducts credit seminars on college campuses.
Teens are the last great untapped market for credit card issuers, but Wood says his research shows that today’s 18-year-olds are less eager for their own card than in previous years.
“We know that teens are learning about personal finance at younger ages, and they’ve also heard horror stories about other teens who’ve gotten into trouble with credit card debt,” Wood says.
Also, many teens already carry debit cards and phone cards, which can function somewhat like credit cards, thus reducing the novelty of their own charge account.
Today, 37 percent of 18- and 19-year-olds have a credit card in their own name, says Teenage Research, while 12 percent of teens overall, ages 12 to 19, have a credit card that a parent helps them obtain.
Expert advice: Because credit card use is an integral part of personal financial management, Cate Williams, president of Consumer Credit Counseling Service of Greater Chicago, says that young teens should probably be given a card to use in a supervised, limited fashion. In fact, Williams says she recently gave her own 15-year-old a card sponsored by a retailer that sells clothing her daughter finds attractive and affordable.
“I call it a credit card with training wheels,” Williams explains. “I want her to have the chance to make some consumer choices. If she buys $150 worth of clothes and chooses to pay them off over time, I try to teach her about the cost of interest so she realizes that the clothes will ultimately cost her $170 or so.”
When you give a teen under 18 his own card, advises Duguay, it’s probably a better idea to give him a second card on your own existing account, rather than applying with him and co-signing for an entirely new account. With the former arrangement, a parent receives the bill for all charges the teen makes. When you co-sign for your teen’s card, he, as the cardholder, receives the bill.
When a teen turns 18, it’s best to ask him to return the second card he has on your account, and have him establish a credit history by applying for his own card, maintains Meunier.
– Some 21 percent of teens overall own a debit card, which offers much of the convenience of credit cards, without the bills.
Since nearly all checking accounts now come equipped with a debit card, and Wood says that about one in five teens have a checking account, one can assume that about one in five teens also carry a debit card. And by age 18, more than half of all teens have a checking account.
Often appearing identical to a credit card, right down to the Visa or MasterCard logo, teens can hand a debit card over at the cash register to make a purchase, or use the debit number to buy on-line or through a catalog.
Since amounts of debit card purchases are then deducted from checking balances, teens don’t run the risk of building up charge debts.
Expert advice: A debit card can be a good learning tool to control spending, believes Elizabeth Chiever, director of high school plannning for the National Endowment for Financial Education, an Englewood, Colo., non-profit organization that promotes personal financial education in schools.
In focus groups, says Chiever, teens often mistakenly think a debit card is a source of extra money. If they overspend, “they will quickly be notified by the bank (of overdrafts),” says Chiever, and then learn to spend no more than their checking balance allows.
– Without access to a credit or debit card, teens can’t make on-line purchases, but electronic retailers are hoping to make shopping via the Internet more teen-friendly.
Even though many teens have been pointing and clicking since they were tots, less than 4 percent of teens have said they bought anything on-line, until just recently when the numbers of on-line buyers jumped to 10 percent, says Wood of Teenage Research.
One possible explanation for the increase in on-line purchasing may be the introduction of Web sites specializing in allowing teens to shop without their own credit or debit card.
At least three such sites–DoughNET.com, RocketCash.com, and iCanBuy.com–now exist, which allow parents to establish preset spending limits.
At DoughNET.com, for instance, parents can establish a “credit capacity” account, whereby they input their own credit card number and then authorize their child to spend up to a certain amount on the site. On DoughNET, which partners with retailers popular with the young such as CDNOW and jcrew.com, if a child spends $30 and his parent has $100 authorized in the account, the child can still spend $70 at another time.
Expert advice: Even though these sites encourage kids to save as well as spend by allowing them to set up savings accounts with on-line banks, Williams says they stifle comparison shopping. “They are thinly veiled marketing attempts. They have a captive audience. You must shop through that site and that site only.”
