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Financial Literacy

Banks not very popular institutions. Fairly or unfairly, the prevailing impression many folks have is that bankers are fat cats who make their fortunes at the expense of ordinary people. So here is how to choose a bank while avoiding being ripped off.

how to choose a bank

However, instead of being mad at bankers, perhaps consumers should be mad at themselves. Time and time again, people let banks get the better of them through careless banking habits.

Here are six ways people willingly give up money to their banks when they don’t have to:

1. Savings account rates

Whether you use an online savings account or traditional brick-and-mortar one, savings account rates have dropped to nearly nothing. According to the FDIC, the average U.S. savings account pays a rate of 0.06 percent. That means a $10,000 savings account would earn just $6 a year in interest. That’s hardly worth the trouble it takes to open an account.

Why are deposit rates so low? Part of it has to do with the Federal Reserve’s monetary policy of lowering interest rates to stimulate growth. Some of the blame has to go to consumer behavior. Banks generally have more deposits than they know what to do with these days, so most do not feel compelled to offer a higher interest rate to attract deposits. What exacerbates that problem is that consumers are all too willing to settle for mediocre rates.

While the average savings account pays just 0.06 percent in interest, some of the top savings accounts pay over ten times that. If consumer behavior were a little more rational, deposits would flow toward the top-paying banks and away from the low-paying ones. This would force those low-paying banks to raise their interest rates or risk a severe drop in deposits.

Unfortunately, too many bank customers fail to take an active approach to shopping for rates. Which means they settle for less than a tenth of the interest they could be getting.

2. CD rollovers

Let’s give consumers the benefit of the doubt and say that they actually compare rates for certificates of deposit when they first open a CD. After that, though, too many people just let their CDs roll over automatically at the same bank. Without even comparing to see if they could get a better rate somewhere else.

If the bank knows a CD is going to roll over passively, do you think they will go out of their way to give it their best rate? Different banks have specials on CD rates that come and go. There is always a good chance of finding a better offer when your CD is due to mature. The nice thing about a CD is that, if you make the effort to shop for the best rate, you can then lock that rate in for the term of the CD.

Besides missing out on the best CD rates, people who let their CDs roll over passively are also missing an opportunity to reevaluate the length of their CD terms. The right term depends partly on interest rate conditions and partly on your financial situation. Both of which are likely to have changed since the last time you chose a CD.

3. Mortgage refinancing

This is another situation where banks are more than happy to benefit from a home-court advantage. If they already have your business, they may feel less compelled to offer a better rate when you do additional business with them.

Certainly, it is worth including your current bank in any refinancing comparison you make. If they still own your loan (which is far from a sure thing), they have already approved of you as a credit risk and so may be more likely to approve you for refinancing.

At the same time, though, understand that mortgage rates can vary significantly from one lender to another. Also, risk assessment is a subjective thing. Some banks will feel more comfortable with you than others and thus offer you a lower mortgage rate. Don’t let the convenience of refinancing with the same bank cause you to be locked into paying more mortgage interest than you need to for years to come.

An easy way to compare mortgage rates is to use LendingTree.

4. Checking account fees

Free checking used to be quite commonplace. Now it is the exception rather than the rule. Still, free checking is there for those who are willing to look for it. There are even interest-bearing checking accounts or high yield checking accounts.

Monthly maintenance fees on bank accounts run to over $150 a year on average. Avoiding them can be a big win. Your best bet is to try online checking since online accounts are more likely to offer free checking than traditional, branch-based accounts.

5. Overdraft protection

Protection sounds nice, doesn’t it? Who wouldn’t want to be protected? Well, when you look at the cost of overdraft protection, you may feel a little less safe and warm.

Overdraft fees typically exceed $30 per occurrence. Stories abound of people who bought a $3 cup of coffee and ended up paying a $30 fee. What’s worse is that you might make several transactions before realizing that you’ve overdrafted your account. That means you’ll pay multiple $30 charges.

By law, all banks, including FDIC insured banks, are supposed to leave people out of overdraft protection unless they actively sign up for it. But banks actively encourage people to opt into overdraft protection when starting an account. It sounds like a benefit, but the inconvenience of having a transaction denied is less damaging than racking up multiple $30 overdraft fees.

6. Credit card rates

You know how interest rates generally have come way down in recent years? Well, apparently credit card companies didn’t get the memo. The average rate paid on a credit card is about the same today as it was seven years ago. This means that, relative to other interest rates, credit cards have become a more expensive form of debt.

Rates can be especially high if your credit history is less than perfect. Remember that when you shop for a credit card, they are probably going to advertise their very best rate. That is not the rate you are going to get unless you have excellent credit. So before signing up for a card, find out what rate they would offer someone with your credit history.

Overall, it is a mistake to think of banks as if they were all pretty much the same. There are over 6,000 FDIC-insured banks in the US, which means you have plenty of choices. How you exercise those choices makes the difference between enriching yourself or enriching your bank.

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4 Tips for Teaching Kids About Money

This article was written by in Financial Literacy, Personal Finance. Comments Off on 4 Tips for Teaching Kids About Money

According to the USDA’s latest calculations, a middle class American family will spend about $233,610 raising a child born in 2015 to age 18. And that doesn’t count college. Personally, I think these figures are a bit overblown. But the bottom line is that kids are expensive.

teaching kids about money

So we parents are worrying about where we’re going to get all the money for the children’s expenses and how we’re going to spend it. But in the hustle of everyday parenthood, we often forget to teach them where to get money and how to spend it wisely.

Studies show we’re basically failing at this goal — miserably. Get a load of these statistics from recent studies:

  • A T. Rowe Price survey showed 13 percent of parents never talk about money with their kids, while 30 percent talked to them about money one time a month or less.
  • Only 15 percent of parents surveyed actually set aside specific time to talk to their kids about money.
  • Another study showed that most parents consider some money topics, like family finances, parental income, investments, and debt, “off limits.”
  • One survey from 2011 showed that nearly 60 of parents were helping their adult children financially. This number seems to be lower as the job market has improved. But it’s still fairly common for adults to move back home or rely on the Bank of Mom and Dad.

Clearly, we could do better. And we need to do better. Teaching kids about money should be right up there with teaching them to cook, clean, and do their own laundry before they graduate high school! Managing money well is simply an essential life skill that your kids won’t just pick up by accident.

Of course, that brings us to the hard part: the how.

How do we go about teaching kids about money? There are all sorts of opinions out there on this. But I’m going to try to boil it down to a few basics.

Let Them Practice

Here’s what I think is the primary thing parents miss the mark on: we don’t expect kids to practice with money.

We know they need to practice all these other skills we want them to learn. We’d never turn a 16-year-old loose with our car without taking them for lots of supervised driving time first.

But many of our kids never have an opportunity to practice substantially with money. Sure, they might get a few bucks from Grandma for their birthday. Or get a little allowance here or there. But what you really need is a thought-out system for giving kids the chance to manage money.

Of course, for them to practice with money, they need to actually have money. Luckily, there are a couple of different options in this space.

Option 1: Commission-Style Allowances

This option has been popularized by Dave Ramsey. It posits that kids should be expected to do basic chores just because they’re a member of the household. You don’t get paid just for existing, so why should your kids?

So instead of a set allowance kids get paid a certain amount of money to do particular chores. Each chore has a value. When they do that chore, they get the money for it. Then, they can do what they want with that money, within whatever limits you set.

This option is good for older kids, I think, who want to earn above and beyond what you’re willing to just hand over to them. However, it has its weaknesses. For instance, what if kids don’t have anything on their wish list? They’ll just stop doing extra chores because they don’t need money.

Option 2: A Set Allowance

This is an option I’ve read about elsewhere, but the book The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money by Ron Lieber really solidified it for me.

Lieber argues that kids should get an allowance basically for just being a part of the family. They should get enough money to make decisions that feel fairly high-stakes to them.

The advantage of this option is that kids can practice earlier and more often with money. Also, since you’re just handing your kids money, you can reasonably expect to have a little more control. Lieber suggests having kids split the money into spending, saving, and giving categories. (To be fair, Dave Ramsey also advocates a similar approach here.)

But with this higher allowance comes higher expectations. For instance, you might just stop buying your five-year-old toys or treats at all outside of birthdays and holidays. She’ll have to use her own money when she wants something, which is an incredibly valuable lesson.

As kids age, the expectations can increase. A middle-schooler should be able to manage his or her own back-to-school clothing budget. And a high-schooler should be paying for his smartphone, for instance.

Practice Makes Perfect

You can probably tell which way I lean on this issue. I really prefer Lieber’s style of allowances because it does give kids higher expectations and more consistent opportunities to practice.

In fact, I’ve already seen this play out with my kindergartener. She gets $6 per week in allowance, split evenly between spending, saving, and giving. Watching her figure out how to spend — or not spend — that spending money is enlightening, to say the least.

Regardless of which method you choose, though, the bottom line is that your kids need to practice with money. And they need to practice now, when the stakes are relatively low. This type of practice helps kids start defining wants versus needs, make spending choices, and learn the power of savings.

Sure, blowing the back-to-school budget on a single pair of jeans means your kid will scramble for decent shirts to wear to school. Truly, not that big a deal. But when it’s  21-year-old making $100,000 decisions about which college to attend, she doesn’t have as much room for error.

Be Open and Honest

You’ve probably experienced the power of kids’ truth telling as a parent. If you haven’t, your kid probably isn’t talking yet.

Kids are incredibly perceptive and able to see through our most sophisticated untruths. Sometimes it’s easier to tell a half-truth. But it’s usually not a good idea. Nowhere is this truer than with our finances.

When your kid is with you at the store asking for yet another new toy, what’s your answer? If it’s something like, “We don’t have the money for that right now,” is that really true? In many cases, it’s not.

The bottom line here is that it’s better to be clear with your kids about the reasoning behind your financial choices. For instance, maybe that particular toy doesn’t fit well within your family’s value system. Or maybe you prefer to save extra money for travel versus buying more toys. Or maybe you’re just overwhelmed with the clutter already and know your kids don’t need more toys.

Whatever your reasoning, say it, and stick with it. Unless you’re honest with your kids about your financial choices, they won’t know the why of money management.

This honest can and should expand as children get older. Sure, it might feel uncomfortable to have conversations about investments, debt, and the family budget. But if you don’t have these conversations, your kids will be left to just figure it out as they go along. Not a good thing!

Save Early and Often

Perhaps one of the best things we can use to teach kids about money is saving and the power of compound interest.

Compound interest is a concept even many adults don’t understand. But it’s one of the most powerful financial forces out there.

You can start teaching kids about compound interest as soon as they’re old enough to save money in a jar. For instance, when you dole out allowance every week, you could give your kid a nickel for every dollar that’s still in their jar. They’ll pretty quickly see that it doesn’t take long for the nickels to make another dollar, which earns even more nickels.

Once kids are a bit older, though, it may be best to leave this lesson to the bank. Have kids open a savings account, and regularly put money away. Then, help them calculate how the interest will grow over time.

Bank interest not high enough for you? Help kids buy bonds or a CD. These are great options for mid-term savings. They could be especially helpful when kids are old enough to start thinking of saving for a car. That extra money from interest will come in handy when it’s time to start car shopping!

Keep Sharing What You’re Learning

You may have landed on a personal finance site like this one because you’re still learning about money management. That’s great. There’s always more to learn! So start sharing what you’ve learned with your kids. Even young kids can understand that you’re never too old to learn more about how best to make your money work for you!

 

We recently updated an article here on Consumerism Commentary, arguing that high schools should not require students to take personal finance classes. The article, written by the site’s original founder several years ago, makes some compelling arguments.

But I don’t buy it.

As a parent, I sure plan to teach my kids personal finance. In fact, we’re already talking about how to start teaching our five-year-old about money management. But just because I’m planning to teach my kids these concepts doesn’t mean other parents are. And that’s not only bad for students graduating high school, it’s bad for our society as a whole.

Teaching Personal Finance: Required versus Offered

To be fair, the author of the original piece didn’t argue that personal finance shouldn’t be offered in schools. He argued that it shouldn’t be a graduation requirement. I don’t necessarily disagree with that premise, but apparently some states do. According to a recent Business Insider article, 17 states in the US require public high school graduates to take a personal finance class — or an economics or civics course covering personal finance — before they can graduate.

The article cites the Great Recession as the reason behind this requirement. That time was when many people suddenly had to go into major debt, were underwater on their homes, and had serious financial troubles. When it all imploded, we saw just how lacking in basic financial knowledge the US really was.

So, no, I don’t necessarily believe that personal finance should be required for high school graduation, though the states seem to be moving in that direction. But I do believe that high schools — actually, even elementary schools — should work more personal finance into their educational efforts.

Why Should Schools Teach Personal Finance?

So, why do I think that personal finance should be taught? Here are the main reasons:

1. Many parents aren’t comfortable teaching this subject.

One 2012 survey showed that 81% of parents believe that it is their responsibility to teach their kids about money. But the problem is that two in five US adults rate their own knowledge of personal finance as very poor. Add in the fact that many parents are simply uncomfortable talking to their kids about money, and you get a very sticky situation.

Sure, some teachers may be uncomfortable with teaching personal finance, too. But, honestly, they only need to stick to the basics and it would have an impact on the next generation. If these kids were taught how compound interest works, spending less than you make, how debt works, and the basics of filling out tax forms, they would have a substantial leg up.

Basic personal finance really isn’t that difficult. With a decent curriculum — there are many in action and more being developed right now — most math and civics teachers could handle introductory personal finance classes easily.

2. Personal finance doesn’t have to be a standalone class.

Many commenters on the original article pointed out, fairly, that their kids don’t even have room in their schedules to take all the classes they want to take. The idea of adding an additional course for finance seems impossible. But here’s the thing: personal finance doesn’t have to be a separate course that takes a full year, or even a semester.

The best option, I think, would be to work personal finance concepts into other math courses, starting in elementary school. Even small children can understand what happens when you make $10 but spend $15!

Related: How to Develop the Habit of Spending Less Than You Make

Working personal finance applications into everyday mathematics — and even higher-level math courses, like algebra — helps with two things. First, it familiarizes students with money management concepts they’ll need their entire lives. Second, it helps them see how their math knowledge actually applies to their lives moving forward.

What about other concepts, like balancing a checkbook or filling out tax forms? Many middle and high schools still require economics, health, and similar courses. It doesn’t take a visionary to develop a course that combines these concepts. The end result could be a class focused on functioning as an adult and a citizen in the world. Students could learn to take care of their homes, their bodies, their finances, and their societies in a single course over a school year.

3. We can probably agree on the basics.

Another issue the original article points out is that personal finance is complicated, and there are many different opinions out there. Which type of life insurance? How much life insurance? Stocks or bonds? Traditional or Roth?

As someone who is even reading this blog, you’re probably aware of the many opinions on personal finance matters, most with good research and data to back them up.

But here’s the thing: we don’t necessarily have to give kids all the answers in a personal finance-related class. Instead, we need to help them define terms and understand very basic financial concepts. Here are some of the questions a personal finance class might seek to answer:

  • How does insurance work (whether it’s life, health, or homeowner’s… whatever)? And why do people even pay for it if they’re not likely to use it?
  • How does compound interest work? What happens if I put $100 in a savings account and leave it there for 50 years? Or, what happens if I rack up $500 in credit card debt and make the minimum payments?
  • What is a credit score? Why is it important, and how do you keep it in good shape?
  • Why do we pay taxes, and how do we fill out the most basic tax forms?
  • What are some tools you can use to budget? And what happens if you consistently spend more money than you make?

Learn More: Things You Won’t Find In Your Credit Score

These concepts aren’t that hard. They don’t require us to recommend term life insurance over whole life insurance. And they don’t require a lot of detail. But they give students a jumping off point. Plus, they’ll at least have an understanding of the basic terminology. They’ll know what they’re getting into ten years from now, when they go to buy and insure a home.

Good teaching, after all, isn’t always about providing kids with the right answers, but about helping them ask the right questions. A hands-on personal finance curriculum could do just this, while setting kids up to make better choices in their lives.

4. Students are jumping straight from high school into major debt.

Personal finance instruction may be even more important now than it has ever been. The average college graduate in 2016 had $37,172 in student loan debt. Many high school students are signing the promissory notes on these huge loans before they even graduate!

Sure, there are times when taking on debt to further one’s education isn’t a terrible choice. But all too many students don’t understand the future implications of this choice, including how much of their future income will be tied up in student loans. Even understanding basic loan terminology could help students make better student loan choices, where possible.

Related: How to Remove a Cosigner from a Student Loan

One Fox Business article makes the case that teaching financial literacy early is pointless because kids will forget most of it before they have a chance, or need, to use it. And that may be true. But many high school seniors are already examining school acceptance letters and financial aid offers, and they’re getting ready to take on that debt.

5. At-risk kids need these classes the most.

Finally, the original article argued that kids in high-risk areas don’t have time to deal with personal finance in school because they’re just trying to survive. I would argue that these are the students who most need to graduate high school with a basic understanding of money and how it works.

Sure, kids from advantaged backgrounds are more likely to score well on financial literacy tests, whether a course is being offered or not. But these kids are also more likely to score well on the ACT and SAT, and that doesn’t mean we give up on helping at-risk kids get to college.

If a high school student lives within a few blocks of fifteen payday lenders, they have the right to know what a 25% interest rate looks like played out over time. And these concepts are not difficult to teach in high school.

Read More: Payday Loans’ Fees and Interest Rates: A Fair Comparison?

So, What’s My Verdict?

We may disagree on what should be taught in elementary or secondary school personal finance courses. We may disagree on how those courses should be taught. But I think that we could mostly agree that finding ways to incorporate basic personal finance concepts into our children’s education would be a good thing.

I won’t try to dictate how states should set up their graduation requirements. But I will say that, as a parent, a school offering both advanced calculus and personal finance courses would look pretty good to me!

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Unless you’ve been living under a rock, you’ve probably heard whisperings of the Federal Reserve’s rate hike last month. This is only the third time since the Great Recession that the Fed has increased rates… and, well, it’s both a good thing and a bad thing.

A Fed rate increase means that the economy is on the upswing. The Fed will only raise the benchmark rate when the economy no longer needs stimulus. Janet Yellen, chairwoman of the Fed, said that her organization plans to go slowly with such rate increases. So, it’s best to assume that the Federal Reserve is cautiously optimistic about the economy and where we stand today.

The most recent benchmark increase was only a bump from .75 to 1 percent. It doesn’t seem like much, but even a tiny change in the benchmark rate can spell major changes for your personal financial situation. Let’s take a look at what the latest increase may mean for you.

How the Fed changes interest rates

The Federal Reserve doesn’t directly affect interest rates. Instead, its benchmark rate affects the federal funds rate — the rate that banks charge each other. The banks then pass those costs (or savings) on to consumers by changing the rates of short-term loans. Then, when short-term rates increase, long-term rates increase, as well.

In short, when the Fed increases its benchmark rate, you’ll first feel the pinch with your credit cards and other adjustable-rate or new shorter-term loans. But you’ll eventually feel the pinch if also you try to take out a longer-term loan, like a mortgage.

Here’s how the current rate increase is most likely going to impact your wallet:

If you have adjustable-rate debt

Variable- or adjustable-rate debts — like credit cards, HELOCs, and variable-rate mortgages — will likely be the first place to feel the difference, post-rate hike. A quarter-percentage interest hike doesn’t seem like much, but it can really add up over time. This is especially true if you’re carrying around a lot of credit card debt.

Let’s assume that you’re holding the average American family’s $16,000 worth of credit card debt. Depending on your terms, the rate increase could potentially cost you several hundred dollars per year.

Learn More: How Is the Nation REALLY Doing With Credit Card Debt?

Just how much more can you expect to pay on your variable rate loan? Dig into your statements to ensure you always know your rates, even as they change. Then, use an online calculator to see how much you’re going to pay in interest when your rate increases.

The best way to deal with this particular issue? Just pay off that debt as soon as you can. Right now, you may only be looking at a difference of $100 a year or less. But if the Fed continues to increase their benchmark rates, the interest rates on your already higher-interest debts are only going to increase.

Need a boost to get you started? Consider transferring some of your debt to a card with a 0% APR introductory period. Paying no interest for even 12 or 15 months can make it much easier to get that principal paid down before you end up paying through the nose because of rate increases.

If you have, or are in the market for, a mortgage

Fixed-rate mortgages, which remain the most popular option, may not skyrocket immediately. But the pinch will come.

According to Freddie Mac, the average 30-year, fixed-rate mortgage in January charged 4.15% interest. In March, that increased to 4.2%. That’s a fairly large increase from this time last year, when rates were more like 3.69%. But from February to March, that much of an increase would probably only make a few dollars’ worth of difference in your monthly payments.

With that said, even a point’s difference on a 30-year mortgage can have a big impact on your finances over time. That’s because you’re paying interest on this loan for so long. Even a few bucks a month will add up over the course of 30 years!

Read More: Can This Simple App Get You Out of Debt?

So, what should you do with all of this in mind? Well, if you’re in the market for a mortgage, you might try to buy sooner rather than later. But only if you have a sufficient down payment and good credit. It doesn’t make sense to pay more for a mortgage, simply because you’ve rushed in before you’re financially ready.

With the Fed’s cautious outlook, it doesn’t seem that interest rates are going to skyrocket any time soon. So, it doesn’t make sense to lock in a lower rate if you’re not financially prepared to buy yet.

What about those who already own a home? If you’re still paying pre-Great Recession interest rates of 5% or more, you might want to consider refinancing while the rates are still low. This is especially true if you’re also in a better credit and all-around financial situation now than you were last time you bought or refinanced your mortgage. If nothing else, it’s worth looking into your refinance options now, before rates increase any more.

In the Know: Can You Refinance Your Mortgage With Bad Credit?

If you have savings and investments

Just as interest rates on consumer debt are rising slowly, so will rates on savings products. Chances are you’ll see a slight increase on the rate on your interest-bearing accounts, including savings accounts. Other interest rates — like those on CDs — will also rise, albeit slowly.

Bottom line: now could be a good time to shop around, Make sure that you’re getting the best interest rate on your high-yield savings accounts and, if you’re not, think about switching.

What about your longer-term investments, including those in your retirement account? It’s much harder to predict a rate hike’s impact on savings vehicles like these. When it comes to long-term investing, just stay the course and keep paying attention to the basics, like asset allocation.

Related: The Perfect Asset Allocation Plan

So, what exact impact will the Fed’s rate increase have on you? It really depends on your current financial situation, especially your debt and savings account mix. Just be sure to pay attention to interest rates on both debt products and savings products, so you can take advantage of the best deals around.

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Is Quicken Right for You? Here’s Our Ultimate Review

by Abby Hayes

We’ve always been fans of Quicken here at Consumerism Commentary, and we’ve got a lot of reviews floating around to prove it. But you don’t really need reviews of Quicken from five years ago. You just need to know what to expect from the latest version: Quicken 2017. Here, we’ll give you the highlights, and […]

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How to Pay a Tax Bill You Can’t Afford

by Luke Landes

It’s a good thing I’ve been saving a good portion of my income for the past year. Even with making estimated tax payments — the last of which was due on January 16 — I still have a significant tax bill this year, thanks to increased income. Many taxpayers dread filing their taxes, even if […]

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The Best Budget Tools for Tracking Your Money

by Aliyyah Camp

Budgeting doesn’t come naturally for everyone. Some of us need a little assistance with tracking our income and spending. That’s where budgeting tools come in. There are several front runners in this space. Many of them offer a wide range of features to help you manage your money better. Here are four of the best […]

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Why Do I Have More Than One Credit Score?

by Stephanie Colestock

At some point in your life, you’ve talked about your credit score. In fact, you’ve probably talked about it many, many times. What it is, how to improve it, how much you paid to get it… But what if I told you that “it” is really just one of dozens of potential scores out there, […]

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Wealthy Shanghai Teens Are More Financially Savvy Than Average Americans

by Luke Landes

The Organisation for Economic Co-operation and Development (OECD) recently conducted a study, presenting a financial literacy test to fifteen-year-olds around the world, and has now published the group’s findings. The sample included 29,000 teens from eighteen countries (or, in the case of Belgium and China, two communities, Flemish and Shanghai). The test is designed to […]

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The Best Investments for a Teenager

by Luke Landes

It’s never too early to start investing. In fact, we wish high school students invested even a little. So here are some tips on how to invest as a teenager. It doesn’t hurt to start talking to even young kids about investing. But when they’re teenagers, the can–and should–get hands-on experience. Like many other kids […]

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