If wealth building could be boiled down to a simple formula, it would look something like this:
Money + a decent rate of return + time = a lot!
Young people typically don’t have a lot of money. However, they do have an abundance of time. And when it comes to investing, time is a very valuable asset. It gives young investors the opportunity to make the most of compounding returns.
If you have a young child, it would be a great gift if you would help them understand and maximize this opportunity.
Put their money to work
Today, many children have a lot of money flowing through their hands. Maybe you, their grandparents, or other relatives give them money for their birthday or Christmas. Maybe they receive an allowance or earn money by doing certain chores. Maybe once they become teenagers they’ll pick up an after-school or summer job. Where’s all that money going? Is it all being spent?
To train them from a biblical perspective, teach them to give at least the first 10% of all such money to their church or other Christian organizations. Early training in generosity can mean many, many years of impact—both for the recipients of their generosity and for their own hearts.
Then teach them to set aside the next 50% for saving or investing.
Wait, what? Fifty percent? Even to you, that may seem like a crazy or unrealistic amount. But think about this: At their stage of their life, kids don’t have many of the expenses they will have eventually. They don’t have to pay for groceries, clothing, insurance, or the roof over their head. If they get used to spending 80-90% of all the money they receive while they’re young, they may be in for a very tough money management challenge once they’re on their own.
And here’s an even more compelling reason to teach your kids to be savers and investors: Instead of thinking about what they’d be giving up by setting aside such a large portion of what they receive, think about what they could gain. For example, if they had $3,000 saved by the time they’re 16 and invested that money aggressively, that could go a long way toward funding their retirement.
That’s an incredible thought, isn’t it? Imagine your child having her retirement handled before she even graduates from high school. “Impossible,” you say? Maybe not.
Consider this. If your child put her money in an S&P 500 index fund, and if the market generates its long-term average annual return of 10%, by age 70 her $3,000 will have turned into over $500,000.
And that assumes no additional money is added to the account.
What if she invested even more aggressively and generated an average annual return of 12%? I realize, that’s a big if, but by the time she’s 70, her $3,000 will be worth more than $1.3 million.
Even better, once they start earning income (babysitting, mowing neighbors lawns, and similar jobs they get paid to do count as earned income), begin transferring their money to a Roth IRA. That way, all of the money in their account will be available to them when they retire tax-free.
There’s nothing magical about the $3,000 figure used in these examples or the starting point of age 16, although the earlier they get started with investing, the better. You can try other combinations of amounts of money, rates of return, and time using this calculator https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator.
To help your child get started with investing, open a custodial account. There are several brokers that have no minimum amount required to open an account and offer commission-free mutual funds for as little as $100.
Remember, “Steady plodding brings prosperity” (Proverbs 21:5a). That’s especially true for those who start early.
Matt Bell is the author of four Biblical money management books published by NavPress. He speaks at churches and conferences throughout the country and writes the MattAboutMoney blog.
This article should not be considered legal, tax, or financial advice. You may wish to consult a tax or financial advisor about your individual financial situation.