An 18-year-old receiving extra money is normally a bad combination. They could be receiving money from a lawsuit settlement in their childhood, inheritance from the passing of a relative, or some other money held in trust until this birthday. I have never heard of an 18-year-old holding onto a modest one-time payment of $8,000-$35,000 for longer than 10 days. Instead of investing the money for growth and income that could last a lifetime, they immediately blow the money. Below are just few of the examples I’m acquainted with:
- A young man spends all of it on a new pickup truck, loaded with all the extra options, although he doesn’t have a job to pay for insurance or gas.
- A young woman spends the majority of it on body-sculpting plastic surgery. A few years later, all of the weight is back.
- A young woman is scammed by “loaning” almost all of it to a close relative, based upon his word alone that he will pay her back. Two years later, when she asks for re-payment of the loan, he proudly and indignantly replies, “Prove to the court that you have a signed loan agreement!”
- A young man vaporizes all of it on electronics: gaming consoles along with a spectacular tv and speaker set; and some furnishings.
- A young woman, who had already racked up a lot of credit card debt from living on her own since 17, spent every penny of an inheritance on jewelry.
It is my experience that few 18-year-olds have any financial education, maturity, or self-discipline to handle any money, let alone a large lump sum like the examples above. A chunk of money given to someone ill-equipped to manage it appropriately (at any age) is exactly like handing a sharp knife to a toddler and hoping for the best. Money is a double-edged sword, it can benefit and support, but it can also be poorly leveraged and literally destroy everything that you have. In the examples above, the money was frittered away or lost, creating a large opportunity cost for their financial future.
The way to avoid mismanagement by an 18-year-old is to start providing them a financial education starting between age 5-7, which includes requiring them to save 50% of any money that they receive – too build a habit and expectation of saving money. Once they are age 10-12, give them some minor budgeting responsibilities, such as: school supplies for a semester or a clothing budget for the season. In this way, the kids will have a chance to build favorable money habits, expectations, and better understand the value of money. If some extra money comes their way at any point in their future, there will be a chance that they may place a portion of the money into savings and investments – instead of blowing it all.