To a teenager, 30 is old, 40 is ancient, and folks over 50 made stone arrowheads. Worse, the gap between older people and younger people has broadened with technology. Our best financial lessons can be as out of step as a senior citizen at a rave: “All you need to do junior, is invest just $100 per month. By the time you’re old enough to wear diapers again, you’ll have a million dollars.” We don’t mention the word diaper, but when kids think of delaying gratification until the seventh decade of life, that’s what they hear.
Rather than trying to reduce personal finance to a 140 character text message, I’d like to suggest an alternative., Embrace our inner ancients: It may be the best way to teach kids the importance of investing early. Socrates, the Ancient Greek philosopher, had methods of teaching that are (only recently) gaining the respect they deserve.
He taught by asking strategic questions, realizing that the best learning takes place through discovery, not lectures. When people conclude something themselves, they take ownership of what they’ve discovered. They’re more likely to understand it and less likely to forget it.
Kids can learn that if they invest their money early, they can save less than others in their income bracket, spend more money than their future professional contemporaries AND have more money when they retire. Simply telling them this is less effective than letting them discover it. Here’s how you could start them down the path of discovery:
First, introduce your teenaged child or grandchild to an online compound interest calculator and let them play with the variables. This is mind-blowing stuff.
- $5 saved per day ($1,825 per year) invested at 9 percent per year turns into:
- $271, 149 after 30 years
- $1.62 million after 50 years
- $9.1 million after 70 years
- $122 million after 100 years
Ask questions from afar, with genuine curiosity, about alternative interest rates, investment durations and invested sums.
Then put aside the compound interest calculator for the following, simple word problem:
Lisa saves $2000 per month for 20 years.
Tim saves $200 per month for 8 years and then $600 per month for 34 years.
How much money has each of them “saved” during those years?
Lisa: $2000/month x 240 months = $480,000 saved
Tim: $200/month x 96 months = $19,200
$600/month x 408 months = $244,800
$244,800 + $19,200 = $264,000 saved
Here’s the next question for your protégé. If Lisa (who “saved” $480,000) and Tim (who “saved” $264,000) each earned the same salaries over their lifetimes, which one of them could spend more of their money on the fun things in life?
Of course, it would be Tim, who “saved” nearly $200,000 less than Lisa. With the extra disposable income, Tim could buy flashier cars, afford nicer holidays and blow money on finer clothes. Lisa, meanwhile, is banking on the promise of enjoying a future fortune from her rocking chair. Now for the culminating kicker:
If Lisa and Tim invested their respective savings and earned 8 percent per year, who would have more money at age 60?
Would it be Lisa, who saved $460,000 and scrimped on life’s finer things?
Or would it be Tim, who saved just $264,000, and blew more of his income?
Your protégé would instinctively suggest that Lisa would have more money.
But what if Lisa had invested that $460,000 by adding $2000 per month from age 40-60?
And what if Tim had invested his $264,000 by adding $200 per month between 18-26 years of age, then increased that amount to $600 per month from 26-60?
Even if you know the answer, sound genuinely curious, as if you don’t. Then bring out that compound interest calculator for your protégé to work it out.
Lisa, the bigger saver, would have amassed $1.18 million after “saving” a total of $480,000.
Tim, who started saving earlier, would have amassed $1.61 million, after “saving” just $264,800.
Don’t sermonize about the importance of investing from a young age. Be excited by their discovery, and ask your teen what they think of their findings. Let them talk.
We might still be ancients in the eyes of our youth, but if we embrace our own ancients, with the Socratic method of financial lessons, our young will benefit greatly.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas