When we talk about saving for retirement or other big goals, we often refer to the power of compound interest. Due to compound interest, the most important factor in building wealth isn’t necessarily how much you save. It’s actually how long you save for.
This is why it’s so important to start saving as early as possible. While many people take that to mean starting a retirement account in your 20s, saving earlier than that can be even more powerful. Let’s find out what would happen if your 10-year-old started saving just a little bit of money for a few years.
The scenario. Let’s say your 10-year-old earns a little bit of money each month babysitting, mowing lawns or doing odd jobs. You enforce the idea of spending, saving, and giving. (Let’s be honest, rare is the 10-year-old who will voluntarily decide to save for retirement.)
We’ll say that each month your child earns $100. You require that she give $20 of that to charity, and then split the remaining $80 between spending and saving. So starting on your child’s 10th birthday, she will put $40 per month into an investment account.
Let’s say that this savings takes place every month from age 10 to 18. Assuming a 7 percent rate of return after taxes and fees, your child will have saved up $5,146 by her 18th birthday. And if she leaves that money in the same investments — without adding another dime — until she retires 40 years later, she will have $84,601. That is the power of compounding interest.
The results are even better if you save a small amount throughout your life. Let’s say your child builds on those savings habits you instilled. Instead of adding nothing to that account for the next 40 years, she ups her monthly savings to $100 per month starting on her 18th birthday. Even with that relatively small increase, she’ll have a whopping $349,291 in savings.
Is that enough to retire on? Probably not. But it’s still a big chunk of change built on the foundation of early, small-time savings.
How to help your child save. Most young children aren’t going to decide to save regularly on their own. Even if you show them these numbers, you’ll likely have to enforce these good habits. But parents have a couple of good options to do this.
First, you’ll need to decide how to approach the amount of savings. A good option is to set a certain percentage that your child needs to save. This percentage should be large, since…