Originally created 07/09/02

The pitfalls of plastic



Leave your money at home.

That's one of the best ways for teens to save their dollars, say financial experts - if it's not easily accessible, you can't spend it.

Teens are more financially aware than they've been in the past, but that doesn't mean they don't fall into money traps. There are high school seniors who've filed for bankruptcy after digging themselves too deep in credit card debt, said Elizabeth Schiever, director of the high school financial planning program at the National Endowment for Financial Education in Greenwood Village, Colo.

"They get into overspending because of impulse buying, and it's hard to get out of debt," Ms. Schiever said in a telephone interview.

Teens need to be more financially savvy because of the spending opportunities that are open to them these days, said Sherry Fleming, who teaches economics at A.R. Johnson Health Science and Engineering High School. Credit card companies target teen-agers, and, when they turn 18, teens are able to get their own cards without mom's or dad's help.

Yet teens flunked a recent national survey about personal finances by the Federal Reserve, which oversees U.S. finance and banking. More than 4,000 high school students took a multiple-choice survey in December, January and February, and they only managed to answer about half of the questions correctly. For example, teens didn't realize they would be liable for some charges to a stolen credit card - usually up to $50. They also didn't understand stock benefits.

"Learning about money is as important as earning it," Ms. Schiever said. "Research has shown that highly-paid professionals have problems with money because they don't know how to budget."

One of the most important lessons is that if you don't have it, you can't spend it. Leave spare cash at home and try not to carry around an ATM card, Ms. Fleming advised. Set up a separate savings account - many banks will offer special student accounts with lower fees - instead of keeping all your money in a more accessible checking account. And don't pull out the credit card unless it's really necessary - wanting a new outfit is not really an emergency.

Some people suggest putting the card in a plastic bag and freezing it in the middle of a bowl of water, Ms. Fleming suggested with a laugh. Ideally, the time it takes for the ice to melt should keep you from making an impulsive purchase.

You don't actually have to freeze your credit card, but one thing teens should avoid is impulse buying.

"Stores strategically place things where you can quickly grab them in the checkout line," Ms. Fleming said. "Candy, magazines ... you end up spending $5 to $10 more than you intended."

Make a list of what you need before you leave the house, then stick to it, she said. If you see another item you want, take the time to comparison shop by checking the item's price at other stores.

Teens also should be saving about half of their income if they have a long-term goal such as buying a car or putting money away for college.

"It's called 'paying yourself first,' Ms. Fleming said.

PRACTICAL FINANCE TIPS FOR TEENS

  • Figure out what you're spending your money on. Keep track of all purchases for a week.
  • Write out short-term and long-term financial goals - money for a car, monthly insurance payments, savings for college, new clothes throughout the school year - and work out a budget. Try to stick to the budget. If it doesn't work, don't give up. Revise it until it's workable.
  • Separate needs from wants. Be careful of impulse buys - plan ahead for what you're going to buy. Never buy things just because they're on sale if you don't really need them.
  • Shop sensibly. Comparison shop at different stores. Cut costs when you can - try buying CDs used instead of new. Also check clothing labels - some items might need special cleaning, which costs more money in the end.
  • Pay yourself first: Put half of your income into a savings account. Research compound interest and strategies such as savings accounts and savings bonds, so your money will earn interest.
  • Read the small print. Learn and understand the terms of credit cards and bank accounts. Know what your liabilities are if your credit card is stolen.
  • Save the credit card for real emergencies. If you're tempted to use it, do some math - figure out how long it will take you to pay off your credit debt and how much you'll end up paying in interest. Never send just the minimum payment and, if possible, pay the balance each month.
  • Learn to manage a checking account and balance a checkbook so you don't spend more money than you put into the account. Don't bounce checks.
  • Learn to read financial statements so you can understand your credit card bill, your checking and saving account statements and other money matters. Be sure you understand everything on the statement. If you can't figure it out, ask questions.
  • Start learning about investments and the stock market. Select some stock and follow those companies in the business pages or on financial reports to see how your choices do and how much they would earn for you if you invested in them.
  • Sources: Sherry Fleming, A.R. Johnson Health Science and Engineering Magnet School; Elizabeth Schiever, National Endowment for Financial Education

    Reach Alisa DeMao at (706) 823-3223 or ademao@augustachronicle.com.