Working teen-agers, just like adults, ought to get the most for their money. And not just when it comes to spending it.
A little planning can go a long way toward laying a sound financial foundation, especially when there are many years ahead. Putting money where it will earn the best return means a much larger pot at the end of the rainbow. But the biggest payoff of all, say financial planners, will come from learning how to manage money from an early age.
"If a young person begins good habits in savings early on, he'll have a lifetime asset," says Susan Niezelski, a chartered financial consultant in the Columbia office of Pennsylvania Financial Group, "especially in our society with its orientation toward consumption, where most people spend every dime they make, or maybe more."
"The primary objective is to save," she says. "The secondary objective is where to save."
While many working teens keep their money in bank savings accounts, planners say there is a much wider choice available, including certificates of deposit, money markets and mutual funds. A steady savings and investment plan, they say, can generate funds to help cover college costs, buy a first car or pay for a major trip.
A major reason for teens to save is to stay out of debt, says Niezelski, adding, for instance, that saving enough money to buy a car outright means no car payments.
Deborah E. Voso, president of Voso Associates in Frederick, recommends a multi-step approach.
"Typically I suggest to teen-agers that they open a checking account. You want to make sure it is an interest-bearing account -- they have to learn to ask those questions," she says. "They should also have a savings account."
Interest-bearing checking accounts usually require a minimum balance or a minimum deposit in a savings account. In most cases, a minor will have to open a joint account with a parent. While maintaining a checking account is good practice for someone who soon will be heading off to college, the teen should watch out for fees; they could prove to be excessive for a little-used account.
Once the money hits the level that the teen wants readily available in the savings account, Voso suggests the teen buy certificates of deposit. Money invested in a CD is committed for a certain period in exchange for a higher interest rate.
"They end up like adults where they don't want to touch that money," says Voso. "They want to get more."
Parents, she adds, can offer an incentive, say $50 toward a $500 CD.
Other planners, like Lyle Benson, a CPA with Coyne & McClean, and Richard Wagener, owner of First Financial Advisors in Columbia, suggest that teens sock their extra money away in a money-market account, either with a bank or, preferably, a mutual fund, which usually pays a higher return.
The advantage of money-market mutual funds, Wagener says, is that they yield more than bank money markets, and more importantly, they are a valuable learning experience. Young people quickly learn that their money can earn varying amounts, and they start looking for the best returns.
"They'll get mail, solicitations," he says. "I do it so they can actually start learning about investments."
And there's another reason too, he points out. "From an accessibility point of view, a passbook is better. But a money market account is a better way to go because it's not as accessible."
"There are many money-market accounts you can open for as little as $100," he adds.
A teen-ager also might have access to a credit union, Wagener says, either through his own job or his parents' employers.
The planners suggest that teens look to mutual funds for long-term investments. Time frame and goals, says Benson, are the key to any financial strategy, and he believes a teen-ager putting money into mutual funds should plan to keep it there for at least five years.
Mutual funds pool money from many investors, and professional managers then invest the funds in a variety of stocks and bonds geared toward certain objectives. For teens, planners often recommend growth mutual funds, which look for stocks of companies that have good prospects for growth although they may not pay high dividends or any dividend at the moment.
Many mutual-fund companies have no minimums or very low minimums for opening accounts, and many lower the requirements for children's accounts.
Baltimore's T. Rowe Price, for instance, waives its normal $2,500 minimum for custodial accounts for minors, according to spokesman Steve Norwitz.
Legally, a child under 18 cannot have a securities account in his own name, and custodial accounts are set up under a parent's control. The child gains full control at age 18, or at 21 if that age is specified.
Many funds also have automatic investment plans, where a predetermined amount of money is transferred from a bank account to the fund on a regular basis.
For example, it would be possible at T. Rowe Price, says Norwitz, for a minor to set up a systematic investment plan where $50 is added as often as he designates -- monthly, bimonthly, even quarterly -- to his mutual fund.
"That's really where they get the bang for the buck," says Benson. "And it teaches them to manage."
Wagener also advocates regular investing, ideally in a growth fund, but cautions that a teen with summer income may not want to sign up for a year-round automatic transfer program. But the teen should still determine to invest a regular amount monthly on his own, he adds.
A teen-ager with $1,500, for instance, could keep $250 in a bank savings account, $1,000 in a money-market fund and use the remaining $250 to open a mutual-fund account. He could then decide to add regularly to his mutual fund.
Picking the right fund is, of course, important, especially because of the relatively short time frame even of five years. Past performance -- over 10 years -- and management team should be the key, Niezelski says. A new fund is no place for a teen-ager's money.
Wagener says he sometimes also suggests a teen buy a few shares of stock of a local company like McCormick or Merry-Go-Round.
"They get the annual reports, the proxy statements," he says, emphasizing the worth of the purchase as a learning tool.
By and large, the planners agree, a teen is better off with a no-load fund, one that doesn't have a sales charge.
The bottom line, all agree, is learning how money works.
"If they can just see the big picture of saving daily, weekly, monthly," says Niezelski. "It's the direct opposite of the negative effect that debt has."
Building a nest egg
Does it matter where teen-agers put their money? You bet, says Susan Niezelski, a financial consultant with Pennsylvania Financial Group. Niezelski worked up what a 14-year-old would accumulate by age 21 if investing $50 a month under various annual rates of return, compounded monthly. That would amount to a total investment of $4,200 over the seven years.
L * 6 percent (certificates of deposit, bonds, etc.) -- $5,204
* 10 percent (bond funds, low-risk balanced funds) -- $6,048.
* 14 percent (mutual funds) -- $7,069.
Suppose that at age 21, the investor stopped contributing $50 a month but left the nest egg untouched. At the same average rate of return, here's what the savings would total at age 41:
* 6 percent -- $17,226
* 10 percent -- $44,320
* 14 percent -- $114,378