Five financial tips for teens

It’s Financial Literacy Month — but once again, my daughter’s high school teacher didn’t invite me to speak to her personal finance class. I’m trying to not take it personally. After all, half of the town works in the financial sector. It’s almost as if they were giving these jobs away in the 1990s. Even though I wasn’t asked to present (perhaps they preferred the equity derivatives trader down the street) I’m not going to abdicate my responsibility to offer my own thoughts to the class of 2026. I wrote a draft of the speech I would have given had I been asked. Here it is:

Five financial tips for teens

If you’ve recently taken time away from playing Fortnite or making Tik Tok dances to peruse the news, you’ve heard that you will be the generation that’s going to fall behind your parents’ standard of living. I vehemently reject that opinion.

My generation — Gen X — was said to be slackers. We were supposedly apathetic about everything, but I never cared much about that last accusation. I kid. However, the statistics suggest that my generation has been successful. I’ll let you in on a little secret. As George Orwell said, “Every generation imagines itself to be…wiser than the one that comes after it.” Just ask your Baby Boomer grandparents. Their parents probably didn’t expect much from them either.

You’ve already taken the first step towards a sound financial future by simply signing up for this class. I’m going to provide five other simple steps. I will not overcomplicate it, because it is not that complex.

Step 1: Identify what you value

Understanding your purpose of money may help you to better manage your finances. Your answer will likely evolve over time. For example, my initial purpose was to never bounce a check, because it seemed to make my father angry (rightfully so). Now my purpose of money is to educate my children (and perhaps my future grandchildren) and to travel. Importantly, it’s not to accumulate stuff or to buy things to impress other people. What purpose does money have in your life?

Step 2: Defer gratification

Identifying the purpose of your money will help you to not squander it on superfluous things. I, too, like iced coffee with flavored shots, acai bowls, and sushi dinners. However, they are treats, not everyday occurrences. These purchases add up. A $5 cup of coffee (1) each day amounts to over $1,800 spent in a calendar year. Personally, I prefer to earmark that money for my daughters’ educations.

Step 3: View your purchases through the lens of opportunity cost

Opportunity cost is what you give up when you choose one option over another. I’ll give you an example. You need a new hoodie. You have $200. The options range from a generic hoodie for $50 to a designer hoodie for $200. Don’t view the designer hoodie as “just” costing you $200. Consider too the opportunity cost — the cost of not having access to the money as well as the potential financial return it could bring.

Step 4: Make money while you sleep

Let’s continue with the hoodie hypothetical. You choose to buy the $50 hoodie and put the “extra” $150 in a savings account. A bank will pay you interest for the right to house your money (and there are plenty of account options for teens). Some banks may currently pay you 5% per year. (2) In that instance, the extra $150 will you earn you an additional $7.50 over the course of the year. It may not sound like a lot, but as you get older you will likely add zeros to the calculation. For example, $1.5 million in the bank would earn $75,000. Your money is making money while you sleep!

Step 5: Invest as often as you can

You may be thinking, “$1.5 million! I’ll never have $1.5 million. That’s a terrible example.” Well, maybe it isn’t.

Consider the 401(k), which is the most popular retirement savings plan in the US. The 401(k) is designed for you to contribute a part of each paycheck into the account. You can generally invest the money in investment strategies that provide exposure to the broad stock market, or different parts of the stock market. Your employer may even match your contributions, up to a certain amount.

Since there are special tax benefits, you are limited by what you can contribute to a 401(k) each year. But that limit isn’t nominal. Over my 25-year career, the amount I could contribute each year has ranged from $10,000 in 1998 to $22,500 in 2023. If I had simply maximized my investment in the 401(k) each year and allocated to a strategy tracking the S&P 500 Index, which is comprised of the 500 largest companies in the US, it would today be worth $1.7 million! (3)

Even if your future employer doesn’t offer a 401(k), you have other options to invest, such as opening your own Individual Retirement Account. In my view, no matter the type of investment account you have, the keys are to invest as early as possible, as much as possible, and as often as possible.

Time is on your side

The class of 2026 has never had it particularly easy. You were born into a Global Financial Crisis and lived through a global pandemic. You’ve learned the hard way that it won’t always be easy, and yet look how far you’ve already come. Keep going! Thank you for allowing me to provide five simple steps to guide you towards a sound financial future. I hope I didn’t embarrass my daughter. Hi honey! Daddy loves you!

1. Based on the average price of a cup of coffee in the US in 2022, most recent data available. Source: The NPD Group.
2. Source: Bankrate.com, 3/25/24.
3. Source: Bloomberg, 12/31/23. Based on the returns of the S&P 500 Index. In this example, the annual contribution limit is allocated to the account in equal parts monthly. Indices cannot be purchased directly by investors. Past performance does not guarantee future results.

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