There's an old saying that 'the apple doesn't fall far from the tree'. For those of you too young to have heard that phrase before, it means that children will be a lot like their parents. I was reminded of that the other day when I found my twelve year old reading "The Millionaire Next Door".

Lest you think that I'm some kind of fanatic, I don't give my children homework assignments on money management. The book was just sitting next to my easy chair. But, in fairness, my kids have heard me talk about the value of money on a regular basis. And I do hope that some of the lessons stay with them.

You have the same opportunity to help shape your teen's money perspective. Lessons learned now could save them a lot of grief later. So let's spend a little time talking about what to teach your teens about money.

A cornerstone of building a sound financial future for your teenager is to teach them how to save money. Sounds easy, but even many adults don't know how to do it. And that might be because no one ever taught them.

You can use three strategies to teach a teen to save. First, you can encourage them to reach a goal. Suppose that they want a $100 pair of shoes. Let them save $5 or $10 a week until they have the purchase price. Have them put a reminder of their goal in strategic places. They'll learn patience and persistence. And by the time they save the money, they might also learn that they really don't want the shoes any more.

Another way to encourage savings is to match any money they put into a savings account. Set a minimum length that the money must stay in the account before being withdrawn. Don't want them to put it in with your match and withdraw it a few days later. This won't work for everyone, but some teens will love to watch their savings grow.

The teen years are also a good time to teach your young adult to 'pay themselves first'. That means that they set aside part of their income for savings before spending anything.

It's a perfect time to learn this lesson. Most teens don't have any real financial responsibilities. They don't have items that they're forced to buy each month (like rent, electricity, food). They generally just spend what they have available.

Of course, many adults do the same thing. They spend until they're out of money. Learning to set part of any income aside for savings is a great habit that will pay dividends for their entire lives.

Next a question for you. Do you remember who taught you to balance your checkbook? Most of us don't. And that's a shame. You'd be surprised how many people reach adulthood without knowing how to perform this simple task. And it's important that your teens learn it.

First, they need to know where they stand financially. Even a teenager should know how much money they have. The reason is simple. It's essential to understand that you can run out of money. Balancing a checkbook is a wonderful way of teaching them that there are penalties if you spend money that you don't have.

The alternative is to let them learn to keep spending until they've reached their credit limit. And that lesson will create heartaches later in their life.

PC software makes balancing a checkbook easy. But make sure that they don't just enter numbers and let the software do all the work. They need to understand the basics. You put money in. You write checks to take money out. What's left is the balance.

They also need to learn basic investment information. It's really essential for modern life. Teach them that stocks represent ownership in a company. And bonds are like an IOU. Introduce them to CD's, money market and mutual funds. Perhaps you'll want to subscribe to Money magazine and discuss the articles with them.

Don't forget to teach them how risks and rewards work. They need to know that a big return will include a big risk. It's surprising how many people think that they can get huge returns without taking any risk. That's a good way to lose money.

Also teach your teen about the beauty of compound interest. Let them know that money will double every 7 years if it earns 10%. That means that $1 that they don't spend on a soda today would be worth $128 when they're in their 60's. Compound interest is the secret ingredient of building wealth.

Conversely, they need to learn the risk of compounding debt. They'll learn this lesson before they die. Help them to learn it without pain. Teach them that borrowing money obligates them to pay the loan back with interest. And that credit cards are set up so that they keep making payments each month without ever paying off the debt. In fact, if they pay the minimum due on a charge card each month, it's just like doubling the price of everything they buy. That's a lesson that's less painful if you learn it before the bills come due.

Teach them what things cost. Some families share budget information with their teens. Others prefer to keep that private. If so, send your teen on a pretend 'first apartment' hunt. Have them walk through all the costs of setting up an apartment including rent, utilities and food. It will be a real eye opener for them.

Finally, help them to learn the difference between creative thinking and creative financing. Creative thinking is the ability to have a need and find a way to fill it without spending money. People who don't have money are forced to consider alternative answers. And some of those answers are quite creative.

The flip side is the person who only thinks of creative financing. He can't think of a way to solve his problem without making a purchase. His creative energies are spent trying to figure out who will loan him the money to make the purchase. Not only will he spend a bunch of energy trying to figure that out, but he'll make making payments for quite awhile, too.

Many of these lessons will pay dividends for the rest of their lives. Who knows, if your teen learns them well perhaps the apples will fall close to their tree, too.

Do you have any advice for a teenager with a steady job who would like her savings to grow. I have paid for my college education without taking out student loans. I contribute to an RRSP and I carefully keep track of all my income and expenses. I am not sure what to do with my savings. I set aside 10% of my income, but it is currently in a basic savings account because I don't know what to do with it. I was wondering what the best investment strategy would be for someone of my age. Any help you could give me would be great! -- Anita

Wow! Anita sure is off to a good start. Contrary to what a lot of people think, the young adult years are often the easiest time to save money. They often see their income grow faster than their financial responsibilities. That gives them an excellent opportunity to save.

Anita has already started down that path. So what's the best place for her to park the 10% of her salary that's she's saving? The answer to Anita's question has less to do with her age than what she plans on doing with that savings. The decision making process is the same for any age. The first thing Anita needs to do is to decide what she's saving for.

Why is that true? Her use will determine how quickly she might need it. And, that urgency will affect her investment choice.

Let's look at two simple rules of investing. First, you earn a higher return by assuming more risk. For instance, stocks are riskier than savings accounts.

The Journal of Financial Planning cites studies that show the real rate of return for the S&P 500 (stocks) from 1950 to 1999 was 10.3%. At the time this was written, a short term CD (6 months to a year) would pay about 4.0% and a five-year CD closer to 4.5%. An interest bearing checking account earns 1.0% while money market funds are about 2.8%.

So the earnings difference can be significant. To illustrate, suppose that Anita puts away $1,000 each year for the next 50 years (ages 20 to 70). If she earns 2% on the money, at the end of that time, it will be worth $89,000. But, if it earns 10%, it will grow to $1.4 million. Quite a difference!

That means we need to learn about the second rule of investing: risk can be minimized. Either by diversification or through a longer time frame.

Diversification is a fancy word that means owning more than one stock. If all of your money is in one company and the stock goes down 50%, you have a disaster. But, if you spread your money among 10 different stocks and one drops 50%, you've only lost 5% of your investment. Not nearly as bad. In fact, it's possible that one or more of the other stocks could go up and offset the loser.

The longer time frame reduces risk much the same way. The stock market does have bad years. Sometimes even two or three in a row. But, for the last 100 years, if you took any 10-year period, the return was positive. So you might have lost money in one year. But if you could afford to wait awhile to sell, you would have gotten the losses back. Combined, time and diversification allows Anita to get the higher returns without increasing her risk.

Now let's apply all of this to Anita's situation. We'll assume some life events. The first reason that she might need to access her nest egg is for an unexpected bill (think auto repair). For that she needs money that's accessible immediately. Like in a savings or checking account.

Once she's saved more than enough to cover immediate needs, she's ready for a second investment account. Suppose Anita is also planning on buying a new car or making a down payment on a home in two or three years. Savings earmarked for those purposes would earn more if they were put into CDs.

Longer term, Anita will want to save for her retirement. She already has an RRSP account. For our U.S. readers, an RRSP (Registered Retirement Savings Plan) is a Canadian account very similar to an IRA. A mutual fund investing in stocks would be an appropriate selection here.

Anita is off to a fine start. All she needs to do is to decide why she's saving, how much she needs for that purpose, and then select the type of investment that matches her goal. At the rate she's going, in a few short years, she'll be giving others advice on how to accumulate money!