Children watch what you do—and perhaps the most important financial lesson they can learn from you is the importance of saving for retirement and beginning to do so as early as possible. They may not understand the concept at a young age, but your guidance in this realm can help set them up for life long after you’re gone.
Encourage your children to start saving early and they will reap the benefits as they grow old enough to reinvest their profits over time. Teaching them to start investing early in their lives can also offer the benefit of their being able to lower the minimum monthly savings needed to reach their retirement goals as they grow older. Investing early also has the potential to ease the financial stress of retirement planning by using the long-time growth benefits of compounding interest. Developing a retirement savings strategy with your teen creates an opportunity for you spend time with your child on a project that s/he will have and enjoy for a lifetime.
Keep in mind that to participate in a retirement plan, you have to have earned income. This may be challenging for an adult who has no job, but what it means for children who work can be incredibly beneficial. There is no beginning age requirement to own an individual retirement account—you just have to have earned income. So, if your three year-old is getting paid for a modeling gig or if your teen is in show biz, they can begin saving for retirement at that age. However, some employer-sponsored plans may only allow children who reach a certain age (like 18 or 21) to participate in their plans. Make sure to do your research to help determine a plan that best suits your child and his/her situation.
Learning about financial planning and investing at a young age can encourage children to develop good savings and spending habits that they can carry with them through their adult lives. And, it appears that teens are interested in this subject! In this article by Dave Ramsay, he mentions a survey that found that 50% of teens had a desire to learn more about personal finances, and another study he cites showed that over 75% of children in college were uncomfortable in their ability to make smart decisions regarding their own finances.
Helping your teen navigate the financial world—whether you’re teaching them about retirement planning or simply explaining how to budget—can arm them with the tools they need to be successful with their personal finances in the future. They can learn the basics of balancing a checkbook, how to save money and can even learn investment and stock market strategy basics. By working together with your child, you can help them gain confidence in making financial decisions because of the experience you have given them through retirement planning.
The experience of financial planning is a gift that can last a lifetime, but as mentioned above, the wealth earned from the compounding interest of an early investment can be a gift that carries on through generations. Compound interest at its most basic is simply reinvesting one’s interest earned from an investment.
This article on Investopedia states it best: Compounding is the process of generating earnings on an asset’s reinvested earnings. To work, it requires two things: the re-investment of earnings and time. The more time you give your investments, the more you are able to accelerate the income potential of your original investment, which takes the pressure off of you.
For example, if your 18 year old wants to become a millionaire by retirement age (65 years old), with no prior investments at a 7% investment rate, he would only need to save about $228 per month, according to this nifty Millionaire Calculator.
You can lower your monthly contribution amount to reach your goals by starting with a depositing a small initial chunk of change in your investment plan. For instance, if you started with a $2000 investment, your child would only need to save and contribute about $78 a month in their plan to be a millionaire by retirement age.
We hope this information excites you as much as it does us. We are in the retirement planning business so we are totally invested in the idea of starting early and planning early. However, some individuals may not realize how easy saving can be when you have the knowledge and the tools to do it as early in life as possible. But, now you know…and we hope you’ll take the opportunity to share this article with your children and begin helping them learn how to save and plan to be successful in their own golden years.