There’s an old adage when it comes to building a seven-figure retirement account: “Save early and often.” Implicit in these four words lies the powerful concept of compound interest.
You’ve heard the term “compounding,” you’ve probably grown numb to its true meaning. In case you need reminding, it refers to the fact that, over time, the money you make from your savings actually makes more money for you than your original savings does.
It’s exponential growth. It’s the kind of growth that adds zeroes on the left-hand side of the decimal point. (That’s where you want your zeroes to appear.)
The key component to compounding isn’t your average annual return. It’s the number of years your savings enjoy the benefit of annual returns.
In other words: “time.”
This is the “save early” portion of the saying. The earlier you start, the larger your savings will grow.
Of course, you know this already. But do you practice it? Not just for you, but for everything around you, including your kids.
Here are a few anecdotal stories that might inspire you to stop dwelling on the theory of compound interest and start making it work for those closest to you. The primary takeaway here is, aside from growing retirement (or other) savings, saving at an early age helps teach children important financial lessons.
And kids can’t do it on their own. They need their parents to guide them on this wonderful (and easy) path to future financial fitness.
“For me, I learned the importance of a dollar earned and a dollar saved at an early age by working for my parents when I was a teenager,” says Jay Abolofia, Founder of Lyon Financial Planning in Waltham, Massachusetts. “They encouraged me to contribute every year to my bank savings and IRA accounts.”
At the most basic level, even if the assets don’t grow to excessive amounts quickly (spoiler alert: they probably won’t), developing a habit of saving at an early age teaches your child important fundamentals like planning, budgeting and other critical behaviors.
“As a child, I started putting a few cents in a jar every day to save up for the things I wanted,” says Aaron Shapiro, Founder and CEO of Carver Edison in New York City. “This turned into a few dollars a day as I started to earn more money and the things I wanted became more expensive. Eventually, this turned into automatic deposits in a savings account as a teenager, and then into automatic and recurring deposits into more advanced savings and investment accounts as an adult. Learning to set goals, think ahead, and save for the things you want is a lesson that carries easily into adulthood.”
If your kids are really ambitious, this planning can show them the joys of serial entrepreneurship. They can learn by doing. Your child can make a few bucks doing one thing, then use that money to capitalize another venture, and so on. This will give your child an understanding of how putting spending off today can yield more impressive results down the road.
“I started working at age 10 selling fruits and vegetables off a truck,” says Jay Ferrans, President of JM Financial & Accounting Services in Southfield, Michigan. “I worked after school and on Saturdays, even throughout the summer fulltime. I was paid $5 for a full day worth, plus tips. Instead of buying candy, I put all that money in the bank. After a few years I bought a snowblower with plans to snowplow for neighbors. I made more money from this and established a pattern of saving my money, which allowed me much more freedom to purchase large items as I grew up. On the other side of the coin, many people spend their money on the little things as they grow, not realizing the impact it’ll have on their future. That $5 cup of coffee from Starbucks
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might cost you over a thousand a year, meaning you won’t have money to buy the big items you need because of the small items you bought. We all get to make choices, and it’s through these choices where our financial wellbeing is determined in our later years.”
It’s natural to expect people in the financial industry to have experience saving money in their own childhood lives. More instructive to you, though, is how they might work with parents who help their own children to begin saving at a young age.
“We need to inspire our youth to start saving and investing early,” says Jennifer Garcia, Managing Director for the Garcia Private Wealth Group of Wells Fargo Advisors in Encino, California. “Your most precious asset is time and by allowing your savings to grow over longer periods of time, you could increase the chance of reaching your retirement savings goals. I have a client who gave his son a share of stock when he was born and continued to add to those shares on every birthday. When his son was old enough, he would share with him the statements to show how a small investment can grow over time. Over the years, the annual review of the investment account demonstrated the benefit of adding to the account regularly, as well as the value of time for his investments to grow. The child then starting taking his birthday money and having his dad add that to the investment account. Once he became of age (18), he opened his own investment account based on the education he received from his father as such a young age.”
Parents can sometimes offer great guidance and good examples. Sometimes, however, they don’t provide such a good example. That doesn’t prevent the child from learning. If anything, it can make the child adamant about not repeating the same financial faux paus.
“I often talk to clients about their and their family’s relationship with money,” says Josh Bennett, Founder of Vincere Wealth Management in San Francisco. “One client came from a family that was very irresponsible with money. They lived paycheck to paycheck (or spent way more than they earned) and had multiple bankruptcies. She saw the stress this put on her now separated family. She vowed to not end up in the same position. She got a side job, dedicated her money to save to go to college. Paid her way through college. Then became an avid saver after college even though she was living way below her means. She had about a 50% savings rate working at a high-paying tech company. This led her to get excited, invest more into her knowledge, and reach the status of a millionaire in her 20s. She learned a lot of hard lessons, but the key is she learned and grew from them. I think she is a great example, that anyone from any background can be successful, with the drive and education.”
Marla R. Chambers, Senior Financial Planner at Buckingham Advisors in Dayton, Ohio, knows a young boy who started a lawn mowing service with his brother when they were in middle school. “They worked together on the mowing business until the older brother graduated from high school. This young man learned a healthy work ethic, the importance of keeping good accounting records, and the theory of compounding interest. Today, at age 29, he has a Bachelor’s Degree with no student loan debt, owns a home, has retirement accounts valued in excess of $40,000, and has a healthy savings account balance.”
Financial professionals who practice what they preach will find they can better relate to other people in similar circumstances. In this case, they can also help teach their own child about the power of saving early.
“A few years ago, I starting talking to my 11-year-old nephew about saving and investing,” says Claudia Gonzalez, Chief of Advisors at Kovar Wealth Management in Lufkin, Texas. “We opened a savings account for him and once that accumulated, we invested it. He researched the companies he was very passionate about and we invested in those. He talks about it to his friends and other family members, so hoping that makes a difference in those people’s lives and encourages them to save and invest!”
The story arc gets even more impressive as we follow child savers into adulthood. There we begin to see numbers that will usually impress the typical teenager. These case studies make it easier to show and convince teens to begin saving in earnest.
“My son, Alex, started saving at the credit union when he was in elementary school,” says Teresa Koch, AVP of Marketing at Orange County’s Credit Union, in Santa Ana, California. “Once he had saved $1,000, he then opened a CD. In his teens, he advanced to a checking account and then to the secured credit card when he turned 18. And with his first job, he opened an IRA. Now he works at a construction company and at age 25, he’s an avid saver with an 800+ credit score and over $60,000 saved for a down payment on his first home. Saving has become a natural way of life for Alex.”
Whatever the age of your child (or grandchild), it’s never too late to impress upon them the importance of “saving early and often.” Relaying these true stories may just be the ticket you need to nudge your child into a lifetime habit of saving that can only grow into bigger and better things.