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Why your kids expect to be rich

Turns out most kids think they'll soon earn six-figure incomes. Here's why their expectations are so removed from reality and how you can help your offspring avoid the fallout.
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Article IndexBy Liz Pulliam Weston
Plenty of adults are delusional about money, so it shouldn't come as too much of a shock that teenagers can be unrealistic when it comes to their future finances.
Still, the extent to which teens misjudge their prospective earning power says something interesting -- about them and about the rest of us.
I refer to tidbits from the "Teens and Money" survey Charles Schwab released earlier this year. This poll of 1,000 Americans aged 13 to 18 from a variety of socio-economic backgrounds found that 73% believed they would earn "plenty of money" when they were adults.
In fact, the teenage boys expected to make an average $174,000 annually. Teenage girls expected to earn $114,200.
The reality check:
Median earnings of men who worked full time, year round in 2005, the latest year for which Census Bureau statistics are available, was $41,386.
Women working full time made a median $31,858.
Fewer than 5% of the U.S. population makes more than $100,000, according to the bureau. Only one household out of six report a six-figure income, according to the Federal Reserve's 2004 Survey of Consumer Finances.
Great expectationsYou might expect teens to overestimate their potential earning power if they were planning to become professional athletes, actors or hip-hop recording artists.
But sports and entertainment ranked only in the middle of the 20 career options chosen by the surveyed teens. Far more popular were medicine (including jobs as doctors, nurses and medical technicians), technology (including jobs in programming, network operations and computer repair) and teaching, the three career fields that most interested the kids polled.
Yes, teaching. Now you begin to see how truly out of whack these kids' earnings estimates are.
So what, you might say. Let the kids have their fantasies. They'll find out the truth soon enough.
But that's the problem. These adolescents will soon be making decisions about money that will affect their lives for years, even decades, to come. Those who misjudge their earning power could:
Take on crippling student-loan debt. I hear from too many young graduates with six-figure student loans and salaries under $50,000. These debts cut into their ability to save for retirement, buy a home or meet other financial goals. And you typically can't shake off student-loan debt in bankruptcy court or anywhere else; this is debt that can literally follow you to the grave.
Overspend on credit cards. Eight out of 10 college students have at least one credit card, and many graduate with significant balances. It's easy to justify paying only the minimum on your cards if you think a fat paycheck is just around the corner. But that bad habit can quickly snowball into huge debts that, at best, cost the borrowers thousands of dollars in interest and at worst lead them to bankruptcy.
Overspend on everything else. People who don't understand that there are limits to their financial resources, and that tough choices must be made, are suckers for a credit industry that's happy to let them overspend on cars ("The real reason you're broke") and homes ("Who's most at risk for foreclosure?"), among other expenses.
Fail to take advantage of the time value of money. Once overcommitted, young people find it tough to come up with even the paltry amounts it would take to make them rich in their later years ("Young all but ignore 401(k)s, IRAs"). For example: Every dollar you tuck away in a Roth IRA when you're 21 could grow to nearly $30 by the time you're 65, assuming 8% average annual returns. Wait 10 years to start funding your retirement, and that same dollar grows to less than $14.
Dream all you want, but plan for realitySo clearly, there are serious potential consequences to overestimating future income, and in a minute I'll address what parents can do to help their kids avoid the worst fallout.
But to get there, we need to understand why teens assume they'll be rich -- or if not rich, at least very well off. There are several potential explanations, including:
Continued: It's the media's fault