First tips on handling earnings

Note to Mom and Dad: In this space, we usually try to explain investments like stocks and bonds. The idea is that readers who weren't formally trained in finance can use it as a ``primer'' -- and readers who had the training can keep up with changes in personal finance. But this time, since our theme is ``Children and Money,'' we decided to treat the ``primer'' as just that: a first-step guide for youngsters on what to do with money. What follows, we hope, will be read by kids: Let's say you work hard all summer mowing lawns, bagging groceries, or flipping burgers. Besides the new friends, the fresh air, and the free fries, you now have several hundred dollars more than you did a couple of months before.

What do you do with the money?

At first, you might be tempted to spend it. There's nothing wrong with that. It takes money to buy new clothes, records, stereo equipment, books. Working is the way you earn the money.

But you probably don't need to spend all your money at once on those kinds of things. If you can save or invest part of it, your summer earnings will last into the fall, winter, or longer.

In fact, you might want to divide your summer money into three equal amounts.

The first could go toward records, ball games, and things you've wanted all summer.

The second bunch can go into a savings account. Next fall and winter you can draw out some or all of it to pay for football games, Christmas presents, movies, gas, and so on.

The third bunch can go into long-term savings. Don't touch this money. Each summer (or more often if you work part-time) you can add to it. This is money that can be used for big purchases: a down payment on a car, freshman tuition at college, a big after-graduation trip to Europe.

All three slices of the money pie can go into the same savings account, if you want.

But it might be better to put the first and second bunch into savings in a ``passbook account'. The third bunch could go into a certificate of deposit (CD), where you get a higher interest rate.

The main point is that you should try to plan where your money goes -- and then manage your money so that, on its own, it grows.

The money that you are going to spend soon should be fairly ``liquid,'' meaning that you should be able to get at it quickly. A passbook account is probably liquid enough. If you work part-time and have obligations -- like gas, food, etc. -- a checking account might be good, too.

The money that you are icing away for the big-ticket purchases takes a little more thought. You might want to put this money into a CD, NOW account, or mutual fund.

To open one of those usually takes at least a $1,000 deposit. If you can swing that, you're in business.

But be careful. Put away only what you really think you can do without. You don't want to be tempted to get into your long-term savings unless an emergency comes up.

You have to shop around to find the best deal in savings. Try to match the highest interest rate with the ``term'' (six months, one year, etc.) that suits you.

Now here's where the ``magic of compounding'' comes in.

Let's say you have put $1,000 into a six-month CD and it is paying 9.5 percent interest compounded daily. If you don't touch a thing, in 182 days you will have earned $48.50 in interest.

If you had a one-year CD with $1,000 at 10 percent compounded daily, you'd pick up $105.16. And at the end of a five-year CD, assuming you don't draw anything out, you could earn $648.61.

That may not buy a car. But you can see that if you sock away $1,000 at the end of each summer, pretty soon you'd at least be able to make a good down payment -- or maybe even buy a used car.

Now, if you have a little more money -- or if you're naturally interested in investing -- you can also experiment with a mutual fund or even with stocks.

This is a little more difficult to manage. Your parents can help you find a mutual fund.

You have more risk with this kind of investment. The money in savings or in a CD is insured. If something happens to the bank, your money (up to $100,000) is safe.

Not so with a stock or a mutual fund. The higher risk means there could be a higher reward, but there are no guarantees of safety.

Unless you're just fascinated by one particular company, you might want to try a mutual fund first.

In a mutual fund, investment managers pool the money from thousands of people like you and then buy a collection (or ``portfolio'') of stocks, bonds, etc. You'll have to shop around and decide whether you want a ``growth'' fund or an ``income'' mutual fund. There are hundreds to choose from.

A mutual fund does best if the money is left in it for a long time -- long enough for the companies that the mutual fund money is invested in to grow and prosper.

Those are some basics.

Savings is the first step.

As your income increases, you'll be needing more ways of investing it. And there are all kinds of other ``personal finance'' things you'll have to learn: credit, loans, taxes, real estate, and so on.

To the dismay of financial planners, high schools usually don't teach these kinds of everyday subjects. And even at college you can miss learning about them.

What to do? Read newspapers and magazines. Most have articles on personal finance. You might want to acquire some basic reference books for your home library, too. ``Sylvia Porter's Your Own Money'' is a good one.

And then start investing carefully. You probably won't make a killing, but you'll be learning.