Teens have the most valuable component to accumulating wealth
Investing early in life delivers the most valuable component to investing --- time.
How soon after securing their first job should a young person start investing? Immediately!
Sound crazy? It’s not.
Setting aside money for long-term goals is an uncommonly wise act for a teenager. In fact, a teenager has something that every older saver and investor wants yet can’t get, and that is time.
Perhaps, when it comes to building wealth, time truly is much more valuable to increasing the investment than the actual amount invested or the interest rate earned. The sooner a teen begins to set aside money in a savings or investment account, the longer those funds will earn interest and therefore the more money that will accumulate.
A smart teenager will set aside a portion every time he or she receives money, including wages from a job, money received as a gift, an increase in allowance, etc.; even just ten dollars here or twenty dollars there will add up. A wise young person will then invest the amount saved. Those investments and those earnings will compound over time; what starts out as a dribble of deposits and earnings will build over time to a substantial stream of money. The longer the funds are left in the account, the faster the funds will grow.
How does that happen? It is all thanks to the magic of compound interest. Even Albert Einstein was impressed by it, “Compound interest is the eighth wonder of the world. He who understands it, earns it… [and] he who doesn’t…pays it.”
Compound interest can be explained by the following simplified scenario: Adrienne saves twenty dollars a week in a savings account for a year. She then transfers $1,000 of those savings to an investment account that earns 6 percent interest per year. At the end of the first year her account will earn 6 percent interest on the $1,000 so she will have $1,060.00. At the end of the second year Adrienne will earn 6 percent on the $1,060.00; her account will be valued at $1,123.60. After five years, without any additional deposits, Adrienne’s initial investment of $1,000 will be worth $1,338.23. Adrienne earned $300 interest on her $1000 deposit; it was the compounding of the interest that earned her the additional $38.23.
If Adrienne is financially savvy and continues to save twenty dollars each week over that same period, she will be able to deposit $1,000 into her account at the beginning of each subsequent year. At the end of five years her $5,000 investment will be valued at $5,975.33. Adrienne earned $900 in interest on the $5,000 she deposited; the $75.33 was the result of compound interest. Adreinne has let compound interest work for her; she might well consider this free money.
The magic here is that Adrienne is earning interest on the money she actually deposited into the account PLUS the money that her account has earned for her. It may not seem like a lot of money initially, but with regular deposits and annual interest earnings, the fund will grow significantly.
Investing early in life delivers the most valuable component to investing—- time. Teens interested in taking advantage of the time that is on their side can learn money management and investing skills through MSU Extension 4-H Youth Development.
For more information about children and money, visit www.eXtension.org/personal_finance