A 14 year Old’s Views on Personal Finance

Taking us into the holiday is regular writer Kosmo. I thought about putting this article on sister-site Kid Wealth. However, that website doesn’t make money, so I can’t justify paying Kosmo for articles there. As you’ll find out this is important.

In another programming note, this article is likely to be the last one of the year. Remember to finish strong with these year-end tips.

My son is a Boy Scout.  Dustin is working toward his next advancement (second class).  One of the requirements is to earn money that he can either spend on a particular item or save.  He’s a 14 year old with no job, so his opportunities to earn money are somewhat limited.  Many scouts achieve this goal by mowing the lawn or performing other household chores.  Dustin is earning the money in a unique way – I’m paying him for an interview.  I decided to write an article about a 14 year old’s views on personal finance, so I needed to pick the brain of an actual fourteen year old.

The Price is Right

I decided to play a “Price is Right” game and have him guess the price of various grocery items.  I then checked the price of the items at the local Hy Vee grocery store.  The price is for the brand that we typically buy.

Dustin did surprisingly well on the grocery costs – the total variance was less than 2%.  His answers were reasonable for all of them items.  I suspected that he might be low on the Ruffles, simply because potato chip prices have skyrocketed in the past couple of years.  We don’t typically buy beer, so I threw that one in as a bit of a curveball.  I expected him to be way off, but he was fairly close.

More Expensive Items

I kept the Price is Right theme going, but asked him about some non-grocery items.

Dustin stayed pretty close for the first two items.  His guess on the electronics were further off.  $90 wasn’t a bad guess for the Chromebook – there are a lot of refurb Chromebooks on Amazon in that price range.  It’s actually pretty difficult to separate the new items from the refurbs in the listings, so I had to bounce to HP’s web site to get a good price.  I wasn’t surprised that he was far off on the MacBook cost – the price gap between Chromebooks and Macs is pretty large.

The car price wasn’t too far off for the sticker price of the base model – but by the time you add a few options and pay taxes and other fees, this is going to creep up to around $35K.

Family finances

I asked him to name as many typical monthly expenses as he could.  This was his list:

• Mortgage/rent
• Water
• Electricity
• Food
• Gas
• Insurance
• Car payments

That’s a pretty good list.  Here are a few more to add to the list.  Of course, this is not a comprehensive list.

• Dining out
• Entertainment (cable, streaming, live sports events)
• Cell phone
• Clothes
• Travel/vacations
• Home maintenance

Home maintenance is a big expense that teens may not be aware of.  There’s everything from replacing various filters (refrigerator, furnace) to buying and maintaining lawn mowers and snow blowers to huge expenses like replacing a roof or a furnace.  When you become a homeowner, there’s much more volatility in your expenses.

We then shifted to a conversation about wages.  Dustin correctly guess that the federal minimum was was $7.25.  When I asked him how long it has been $7.25, he guessed that it was set at that amount in 1985.  It was actually set to that level in 2009, which is still quite a long time.

When I asked him the length of the standard work week, he knew that it was forty hours.  The concept of “time and a half” overtime pay was a revelation – he thought that overtime pay was paid at the normal rate.  He did know that salaries employees were exempt from overtime.

Mortgages

I asked what a typical mortgage length was.  He mentioned 15 and 30 years, which are the two most common.

When I asked what the common components of a mortgage payment were, he was quick to name principal and interest.  With a slight bit of prodding, he also mentioned property taxes and insurance.  He wasn’t familiar with the concept of escrow, so we had a brief conversation about that.

I asked why someone might choose to refinance a house.  He said that if someone couldn’t afford the payments, they might choose to refi to spread the payments over a longer time.  That’s correct, but there are other reasons, such as refinancing to take advantage of lower rates or doing a cash-out refinance to free up cash for other expenses.

Taxes

I asked for an explanation of income tax brackets.  His description showed a very clear understanding of how they worked – with income at each level being taxes at progressively higher rate.  He knew that the income at lower levels was not taxed at the higher rates.  The concept of marginal tax rates is something many adults don’t understand.

Dustin was able to name property tax and sales tax as other types of taxes we pay.  He was unfamiliar was several other types of tax, such as gas tax and the hefty taxes that are levied on cigarettes.

He guessed that Social Security was a 10% tax and didn’t realize that the employer and employee each paid a share.  Employer and employee each pay 6.2% for social security (OASDI) and 1.45% for medical.

I had him guess the exemption amount for federal estate tax.  His guess was $5.5 million for a single person and $11 million for a married couple.  In 2025, the exemption will actually be $13.99 million for a single person and $27.98 million for married couples.  Some states have a state estate or inheritance tax.  In our state (Iowa), the existing inheritance tax will go away on January 1, 2025.  Even prior to this change, direct line descendants and ascendants were exempt.

Investments

I asked for an explanation of some terms:

• Market capitalization: stock price time the number of shares.  Correct answer.
• Diversification: Having investment in many different sectors.  He studied the stock market in a class at school, and we’ve discussed the importance of diversification on many occasions, so I’m not surprised that he got this correct.
• Capital gain: Dustin was unfamiliar with the concept of a capital gain, which is the amount that an asset has increased from its purchase price.

Stock market knowledge

I asked him to guess the top five companies by market cap.  His answers:

• Apple
• Amazon
• McDonalds
• SpaceX
• Tesla

The five companies that actually have the highest market cap are

• Apple: 3.75T
• Microsoft: 3.31T
• Nvidia: 3.21T
• Amazon: 2.39T
• Alphabet (Google): 2.32T

Dustin got two of them right.  Here are his other three guess:

• Tesla (8th): 1.45T
• McDonalds (51st): 213B
• SpaceX is a privately held company, but is estimated to have a value of around $350 billion.

Then came the fun part – guessing the top five companies in market cap in the year 2000.  Note that this was almost a decade before he was born – how well would you do with this question?  Here were his answers:

• Yahoo
• Google
• Microsoft
• Nvidia (We discussed the current top five before I asked him for his Y2K list)
• McDonalds

Here are the actual top five:

• Microsoft: 586B
• GE: 477B
• Cisco: 377B
• Walmart: 260B
• Exxon Mobil: 260B

Dustin got one of those five.  Here is the market cap for the other four in 2000:

• Yahoo:114B
• Google: Went public in 2004, with an IPO valuation of 23B
• McDonalds: 54B
• Nvidia: 1B

This was a lesson in how a company’s fortunes can change over time.  In 2000, Google and Nvidia were still fairly small companies that have skyrocketed.  McDonalds stock has been up and down over the years, with an overall gain of about 5-6% per year.  In 2016, the core assets of Yahoo were sold for about $4.5 billion.  Yahoo was the search engine juggernaut in its heyday, but was left in the dust by Google.  Apple was a well-known company, but its market cap at the end of 2000 was 4.2B.

Then I asked for the top three companies by revenue.  Here were his answers:

Here are the actual answers

• Wal-Mart: 648B
• Amazon: 575B
• State Grid (Chinese electrical grid): 546B

Apple is 7th (383B), behind Saudi Aramco, Sinopec (Chinese petrochemical), and China National Petroleum.  Microsoft’s revenue for the past year is about $250 billion.

Overall results:

Overall, Dustin did quite well in the exercise.  I was pleased that he did as well with the Price is Right questions as he did.  This will hopefully prevent sticker shock when he is living on his own and buying his own groceries.  While he does have some gaps in his knowledge, this is to be expected with someone his age.  Overall he has a good grasp of personal finance and the stock market.

Editor’s Thoughts

My own son is a 12-year-old in Scouts, but he’s not too far trying for his Second Class rank. I don’t think he’d do nearly as well as Dustin did here. He doesn’t go shopping with me very often, so I don’t think he’ll know the grocery prices. I could be surprised though because he has a crazy memory and he might remember prices from one time a while back.

I was amazed at the financial knowledge of the other stuff. I doubt I knew about mortgages at age 14 and I was reading Kiplinger’s and investing in mutual funds. I think Dustin did better than many adults would do.

On a side note, I was driving the kids to school a couple of weeks ago and they went into a detailed conversation about inflation that was dead on. I was quite surprised (and proud!) I often give little financial nuggets as they come up, but I don’t think inflation has been part of that.

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