You’ve worked hard, saved diligently, and made investments that have taught you valuable financial lessons along the way. Now, as you plan for your retirement and consider providing for your children and grandchildren, it’s essential to think beyond just leaving them a financial inheritance. It’s important to talk openly about smart money management and strategies. In this post, we’ll explore three key tips on how to effectively teach the younger generations about the importance of investing and managing money wisely.
The Magic of Compounding:
Many adults struggle to save consistently for retirement, let alone younger individuals. So, how can you spark a child’s interest in saving and investing for the long term? The answer lies in illustrating the power of compound interest.
Imagine this scenario: You offer your child a choice between receiving one million dollars today or starting with a single penny that doubles in value every day for a month. At first glance, the million dollars seems like the obvious choice. However, after 31 days of compounding, that single penny grows to over 10.7 million dollars.
This simple exercise highlights the remarkable growth potential of compound interest. By starting early and consistently saving and investing, even small contributions can turn into substantial wealth over time. This storytelling approach helps children understand the long-term benefits of financial discipline.
The Importance of Starting Early:
To emphasize the significance of starting early, consider sharing a comparison between two individuals: Ashlyn and James. Both are 20 years old, and they both hear about the importance of saving for retirement.
Ashlyn begins saving $250 per month for her retirement at age 20 but stops at age 30. In contrast, James doesn’t save anything from age 20 to 30 but decides to start investing $250 per month at age 30 and continues until age 65.
Despite Ashlyn contributing only $30,000 to her retirement account compared to James’s $105,000, she ends up with over $1.34 million at age 65, assuming a 10% annual return. The reason is simple: Ashlyn’s early contributions had more time to grow, demonstrating the power of compound growth.
Teaching children that early savings not only secure their future but also provide financial flexibility in their prime working years can help them grasp the importance of starting early.
Applying Compound Growth Everywhere:
Compound interest isn’t limited to investments; it applies to personal growth and skill development, too. Just as your money grows over time, so can your abilities and expertise.
Show children that by continually improving themselves, they can experience exponential personal and professional growth. Use the example of getting 1% better each day, which translates to 365% improvement in a year. This principle can apply to their careers, relationships, and skills, setting them up for success in all aspects of life.
Teaching children and grandchildren about the significance of investing and managing money wisely is a valuable legacy. By conveying the magic of compound interest, emphasizing the benefits of starting early, and applying the concept of compounding to personal growth, you can equip the younger generations with essential financial knowledge and empower them to secure their financial futures. Remember, the greatest inheritance you can provide is the gift of financial wisdom.
Need help with your retirement?
Work directly with a licensed financial advisor at Root. Book a no-obligation initial call now so we can show you how we’ve helped hundreds of people just like you build a retirement they love.