Happy 2015! As this year unfolds, one of the best gifts you can give your children is to teach them to save – early and often. That’s especially true for “kids” in their 20s, who have managed to land their first job out of college. Why? The younger they are when they start saving, the less they have to invest to get the same long-term results.
Take a look at the chart below. Assume we’re looking at the savings amassed by triplets — Susan, Bill and Chris. Chris is the model child who starts saving regularly at age 25 and therefore has the largest portfolio at age 65. No surprise there.
What IS interesting is the result for the other two kids. Young and ambitious, Susan puts away $5,000 a year for 10 years and then just stops. Late-starter Bill saves the same amount as Susan for 30 whole years, starting at age 35. So Susan saves for just 10 years, Bill for 30 years. Assuming they invest in the exact same things (7% gross annualized return), who will have more money at age 65?.
The answer, as you can see, is Susan. By age 65, Susan will have $602,000 (nearly $60,000 more than Bill), even though she doesn’t invest a dime after she turns 35! What’s more, Susan’s portfolio remains consistently ahead of Bill’s.
So if you can’t be Chris in this scenario (few people are that consistent), it’s better to be Susan rather than late-starter Bill.
OK, you may think, but can 25-year-olds actually save money? The answer is yes, definitely. But the habit to save has to start way before they get their first real job. A five-year-old, for example, can start with a piggy bank, move up to a checking/debit account at age 10, with the addition of a brokerage account at age 17. By the time the first job comes around, he/she will already have the mentality to save and invest.
Here at LNWM, we advise a gradual buildup in financial responsibility, using a variety of age appropriate savings and investment accounts. This allows kids to get comfortable with each step they take toward financial independence. And the best time to start is now, with all those cash gifts from the holidays!