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Salvation in savingsLearning fundamental principles key for college, life
(CNN) -- You're 11 years old, and you put away $600 into an account with a 12 percent annual compounded interest rate. For the next seven years, you continue to put $50 each month into the same account.
By the time you're 18, the $4,200 investment will turn into $22,955. Let it be, and it will be worth $488,508 when you're 45, and $1,082,145 seven years after that. That's the power of savings -- putting aside money now and letting it grow. Yet most teenagers aren't planning for their retirement years. Paying for college is more of a priority, even if a 1999 survey by the international financial company Merrill Lynch indicated only 42 percent of teens save primarily for their education. "The point is to show (teenagers) how quickly money can grow," said Mitch Slater, a vice president at Merrill Lynch. "It is one of those things that needs to be talked about and not ignored." Facing down college costsWhile the example of savings mentioned earlier might seem great, few high school students like the following formula. Start with $25,000, a standard figure for one year at a private college. Multiply that by four, or however many years it takes to graduate. Add in $20,000 or so for living expenses over those years. Among other things, it equates to a gigantic headache. But by knowing and doing something about savings, experts say, paying for college need not be so daunting. The key is starting early. 
"We develop good habits and bad habits -- both are hard to break," said Clark Howard, a consumer advocate in Atlanta. "The whole idea is getting in the habit of saving money." Howard advocates the "dime to the dollar" approach in which you save a dime for every dollar you earn in allowance, paychecks or gifts. Or you might use the three-jar system in which earnings are divvied into spending, savings and charity money. To encourage teens to save, Howard likes "challenge matches" -- with parents matching every dollar their child saves. The sum can be put in a Roth IRA (Individual Retirement Account, which is tax free) or be used to buy nonprofit mutual funds designed especially for students. Considering how much money American teenagers spend ($153 billion in 1999, according to Chicago market research firm Teenage Research Unlimited), Howard does not think it's unrealistic for most teens to be ready to pay for college with adequate preparation. "If a kid has enough money to go to the mall, then they should take some amount of that money and put it aside," he said. On to plan BThe approach is much different for a student, in his or her junior year in high school, who has not saved up for college. "If they haven't saved at all, by the time they're 16 or 17, you've got to really play the game -- play the scholarship game -- or you're going to have to pay your own way," Slater said. One option, often the first given by colleges in their financial aid packages, is taking out loans. But Slater calls these "a court of last resort if you don't have any other choice. You want to exhaust every other avenue first." Howard agreed, saying, "Every dollar that they don't borrow now is a dollar they don't have to pay later," adding that many times you must pay interest on the money you owe. When money's tight, Howard said that financial aid packages could make a big difference. "The public colleges aren't always going to be the net cheapest," Howard said. "The real opportunities are at third-level private schools that are in such competition for students." An essential life skillEven when students must resort to loans or scholarships for college, learning how money works, and grows, is an essential life skill. Slater said it's important all teenagers understand the basics of economics, including how banks and the stock market work, even if it means learning the hard way. "They're not always going to make money, but kids should be involved in the market," he said. "They should buy what they know." In the long run, it will pay off, said Howard. "I know it sounds stupid, but I don't care as much saving for college as saving for retirement," he said. "For college, there are so many ways to pay for it. Retirement, there's only one way to pay for it -- yourself." RELATED STORIES: College bills and tax breaks RELATED SITES: College Savings Plans Network | ||||||||||||||||||
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