My 16 yr old cousin just recently got a part-time job at a restaurant working in the kitchen as a busboy. He asked me for advice on how to handle his money because he "wants to be rich like me". I was very taken aback at this statement and asked him why he thought I was rich. He stated well, you have a nice house, a nice car and alot of other nice things. I decided I should really open his eyes because he apparently is incorrect in what he considers rich. To make it simple to a 16 yr old, I tried to break our conversation down into sections.
Cars: He wants me to go to the car lot with him so he can by a new "phat" ride. I then proceeded to explain that new cars depreciate significantly when they drive off the lot. His response, why do so many people buy new cars? This is a good question but I did not have a good answer for him. I explained some people are actually paying cash for their vehicles and some people are financing them. When you finance a new car with debt, you usually end up owing more than the car is worth, especially if you put no money down or roll over another loan. Lesson: Save up and pay cash for a good reliable used car.
Debt: I asked him how would he like to always owe someone else money? He said he would not like that. I told him that is the way it is when you have debt. You always owe someone money as long as you are in debt. I told him if you finance a home or an education, it is different because you are using debt for an asset that can better prepare you for the future. The one debt you should always avoid is credit card debt. Credit cards are fine if you have the discipline to pay them off every month. Lesson: Only use debt to acquire assets and do NOT carry credit card debt.
Savings: This one was pretty easy because thankfully, his parents had already told him about this one. Although, they only explained plain old ordinary savings accounts. I took it a little further and described investing and retirement accounts. He has about $500 saved right now but once he saves $1500, he will invest $1000 and leave $500 in the bank. Lesson: Make your money grow outside of regular savings accounts or your purchasing power will decrease as inflation eats up any interest you earn.
To summarize our conversation, I told him looks can be deceiving. That person driving that "phat" ride could be in debt up to their eyeballs. Another thing is not trying to keep up with the "Joneses", which is funny because his next door neighbors last name is Jones. They also have a "phat" ride. I also advised I am not rich and I am far from it. If I had taken my own advice that I gave him, I would be in a much better financial position.
So how did I do? How would you have handled this? Anything else I should tell him?
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