When my nephews, Tyler and Adam, were six and eight years old respectively, I helped them start a portfolio of index funds. At the time, their mother insisted they split their weekly allowance three ways: a third for spending, a third for charity and a third for investing.
They earn their own money now. Fourteen-year old Tyler delivers newspapers. Adam, age sixteen, referees hockey games. He also works at a shop that makes gourmet sausages. If they continue to invest, they should have millions of dollars before they reach retirement age.
These boys, however, are far too young to worry about retirement. Fortunately, they might never have to. Their money has time to compound. As a result, they can invest smaller sums than most and build more wealth than most. Whoever coined the expression, “You can’t have your cake and eat it too,” wasn’t referring to the power of compound interest on investments.`
Albert Einstein once said compound interest is more powerful than the splitting of the atom. But it needs time to work its magic.
For example, assume a 20-year old man began to invest $50 a month in 1972.
He bought a low-cost balanced mutual fund: 60 percent U.S. stocks, 40 percent U.S. bonds. If the fund’s performance matched its benchmark index, it would have grown to about $473,701 by May 31, 2018. According to CNBC, that’s almost three times more than the average retiree has.
It also represents a lot of bang for the buck. By investing $50 a month, his lifetime contributions would have been just $27,250. That’s just $1.66 per day. If, however, this guy waited five years before starting to invest, he would have needed to save 65 percent more each month to reach the same portfolio size.
It could be worse…a lot worse. If he didn’t begin to invest until he was 45 years old, he would have needed to save $775 a month to reach the same portfolio size. His contributions would have totaled $222,000. That’s almost ten times more than he would have needed to save if he started when he was twenty. Yet, the portfolio values would have grown to about the same amount.
When it comes to investing, procrastination hurts.
Chase Schachenman figured this out when he was sixteen years old. He’s now twenty-two, and a recent graduate from the University of Wisconsin-Madison. He earned a B.S. in Computer Science and a Certificate in Entrepreneurship. Six years ago, Chase opened a custodial account to invest in one of Vanguard’s Target Retirement Funds. Even better, he uploaded a screencast to show how it’s done.
“I contributed to my custodial account before I went to college with some money from a part-time job and some graduation gifts,” he says.
He added smaller sums when he was in college, thanks to money he earned at a couple of internships. But now he’s ready to ramp up the savings. He’ll soon begin full-time work as a software engineer with Enova International.
“Right now,” he says, “the balance in my account is $10,721.79. A lot of that came from dividends and investment returns so it was really cool to watch it grow. I'm super excited to start my career and to continue saving and investing.”
Like my nephews, if Chase keeps adding money, he should have millions of dollars long before he retires. Some of his friends might build the same amount of wealth. But if they start investing later, they’ll need to save so much more.
Don’t Punish Your Kids: Teach Them This Financial Lesson
|Beginning Year||Monthly Investment Required||Total Savings Required To Reach Portfolio Size||Portfolio Size: May 31, 2018||Compound Annual Return|
|Source: portfoliovisualizer.com, 60% U.S. stocks, 40% U.S. bonds (January 1972-May 31, 2018)|
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas