It is never too early for our kids to begin investing. Even at a young age, they can start influencing their financial future.
We were kids once too and we know how tempting it is to spend that first pay check. Our friends are spending theirs and buying new clothes, cars and other exciting things. Why would we want to forego that and invest? It sounds boring.
Even so, is it worth doing it at a young age? Absolutely.
How To Get Your Kids To Buy Into The Idea Of Investing
To get kids to buy into this notion, it helps to provide them with a real-world example of how starting early can start them on the path to being millionaires.
Here’s an example to give your kids:
You and your friend, Dave, are both good students and have part-time jobs. However, you like to spend rather than save the money you earn. Dave is much more focused on saving his money and starting at age 20, he was able to put aside $38 a week or $2,000 annually. Unlike you, Dave invests his savings and has returns of 9% a year (the 30-year average return for global stocks.)
It is now 10 years in the future and you are both age 30. You decide to start investing and like Dave, you invest $2,000 annually. You also receive a 9% return. Since age 20, Dave has only saved $20,000 which isn’t too much for you to catch up to. Or is it?
In actuality, Dave is way ahead of you. Since Dave got an early start, compound interest has already begun working its magic and it will continue to do so for the rest of his life. That’s because his interest will gain interest each year and that means more savings as time progresses. In just 10 years, Dave has amassed over $10,000 in interest alone (see below in the green bars).
Let’s now take a look at you and Dave at age 70. Your friend who you thought was not much further along at age 30 is now $1 million dollars richer than you. He only saved an additional $20,000, but with compound interest, that $20,000 grew into a $1.6 million (whereas your $20,000 grew into just a little over $738,000 — less than half of Dave’s portfolio).
You can see the difference in the graph below…
My point is, the sooner you start, the more money you will earn by letting compound interest work for you.
Another perspective of looking at this is, the later you start, the harder you have to work to achieve your financial goals (see diagram below):
Other Advantages To Investing Early
There are other advantages for teaching our kids to invest early. Longer-term investments have a much better outlook for returns because over time the ups and downs of the market generally balance out.
If your kid makes a mistake, which is likely at some point, time is on their side and they will eventually recover. An investor who is aged 60 is going to have a much harder time recovering from a 30% loss than a 30-year-old. Also, when you are starting off, your portfolio is smaller. Making a mistake is not as devastating as it is when it has grown larger.
As with most things in life, investing requires a learning process. When we start early, we have more time to learn the right way to invest and develop financial discipline. It is much easier to do this before we have the responsibilities of a family to support or a mortgage to pay.
We also benefit from having a sense of financial security. The knowledge that we have ample funds to withstand tough times can greatly reduce our stress levels and increase our level of confidence. That in turn, can only have a positive influence on other areas of our life.lives such as relationships with others, our families and job performance.
Understand And Benefit From The 8th Wonder Of The World
When referring to compound interest, Albert Einstein said it was the “eighth wonder of the world.” He added that, “He who understands it, earns it. He who doesn’t, pays it.”
Compound interest will work for us for a lifetime. If you haven’t already, start saving and let it work its magic for you.