A Valuable Lesson We Can Teach The Young People In Our Lives

Can you remember back to when you were 20? Perhaps you are a 20-year-old member here on Wealthy Affiliate. You will have heard this lesson many times but it is worth hearing again.

This lesson is also one you can teach your kids and young adults in your family. It is about one of the miracles of finance.

The Power of Compound Interest Over Time

Look at the graph below. What do you think it would take a young 20-year old to accumulate the sum below at 65? Go past this graphic below and you will see the answer. This is a very conservative result.

One can do much better as I shall be illustrating below.

Here is what it would take to earn over ONE MILLION DOLLARS in 45 years doing very little. The following is a screenshot from the financial calculator I used. I will be providing a link at the end so you can play around with it yourself.

The S&P generated an annualized return of 9.7% from 1965 to 2018. This was a period of 53 years. Hence, it is conceivable that over a 45-year period an annualized return from the stock market of 10% is not unreasonable.

The Lesson

The younger the kids are, the better. Follow through when they are older.

Teach a 20-year-old to save $100 a month into a fund that mimics the S&P 500 and do this religiously. When they retire, that will have compounded to over $1,000,000.00.

When you have time on your side, it is amazing how many up and down markets one can endure and still come out gang busters at the end.

This can actually get better.

Notice how for the first 20 years growth looks anemic in the above graph? But this is how compound interest works. It is in the latter 20 years that the most growth occurs. That is the power of long term compound interest.

Use A Little Smarts For Bigger Returns

The easy way is to play is safe. But there is a better way. If that 20-year-old was willing to do some research, they could come across 10 companies that averaged an annualized growth rate of 15%. Then use dollar averaging to purchase the stocks.

When the stocks rose in value, that $100 would buy fewer. And when these stocks declined in value, their $100 would buy more.

Let's see what an annualized interest rate of 15% would do to that monthly $100 investment in the graph below.

ALMOST 7 MILLION DOLLARS!

Notice that the principle hardly rises at all, It is the compound interest that creates the wealth.

I strongly believe that these are the kinds of things that should be added to the school curriculum. I know that kids do not plan more than a few days ahead. Then why do we teach them Math?

These days kid's earn money doing odd jobs quite early in life. If they started saving early, can you imagine what they could do to help their future?

Here is the tragedy. Time once passed cannot be regained. We are all in that situation now and that is why many of us here are working hard to make up for lost time.

Here is that calculator I told you about. To plug in numbers of your own, you can go to this financial calculators.

The Million Dollar Question

Ask yourself this question.

If you knew back then what you know now, would you have done everything in your power to have saved $100 a month? Heck, if could have invested only $50 a month, that would have generated over $3,500,000.00 over 45 years.

If you have children or grandchildren, please teach them how they can use time to create wealth for their future using a relatively modest savings fund right now.

This can be made really interesting by showing them how they can research the companies they buy stuff from. By investing in these companies they could create a bright future for themselves.

Brainstorm Companies To Invest In

All kids are familiar with companies like Apple, Google, Microsoft, Facebook, Twitter, Netflix. Tesla, Amazon etc. Do your own research first, and then help them to conduct their own.

I am sure that kids these days are familiar with the next Apple, Google and Microsoft. Perhaps they already know how popular these new companies are becoming. Maybe, they could create a basket of companies and steadily buy stock in them using a small portion of the money they earn and are given.

When they see how their investment grows, that will create excitement.

The opposite can also happen. Hence, it would be crucial to include in this research who the management team are. What was their track record before. Are the products and services they are making will be if interest to these kids in the future? Then trust their judgment.

If I had known what I know now I would have happily invested a small amount every month for my future. When I started doing that in my (401)k fund, I had to save much more each month and ended up with far less when I retired.

Any thoughts?

Cheers.

Edwin