Teaching Your Children about the Power of Compounding
Getting your children to start their “savings habit” early in their life is one of the greatest gifts a parent can give their child. Now, notice that I did not say give your child a bucket of money, but rather give them the knowledge and insight into how important getting started early truly is.
As each of my children turned 18, I sat down with them, and with one of their best friends, and started the discussion of savings, and of the power of compounding. I told them that I’d like to see them start a savings habit and I posed this question for them.
If Person A were to save $2,000/year for 13 years (from 18 to 30) and he/she invested that money in an S & P stock index fund that earned 8% in annual return. And if Person B started saving the same $2,000/year, but started at 31 years old and contributed that same amount ($2,000/yr.) for the next 37 years (until age 68); and earned the same rate of return, who has the most money at Retirement – age 68?
Many people believe Person B, who invested that $2,000/yr. for 37-38 years had to have more than someone who had contributed $2,000/yr. for just 13 years, but this assumption is way off!!
Person A - contributing $2,000/yr. from 18-30 years would have $800,000 at age 68.
Person B - contributing $2,000/yr. from 31-68 years would amass $440,000 (nearly 50% less).
Person C - contributing $2,000/yr. from 18-68 years would have $1,241,000 (nearly 3x Person B).
As the attached chart shows, the person who started at 18 would have more than 80% more money at age 68 – despite having contributed for a total of 25 years less than the person who started at 31 years.
Even more importantly, if someone started contributing $2000/yr. at 18 and continued to contribute through age 68, they would have nearly 3x the money of the individual who started at 31.
The longer you can let your money compound/grow will make a huge difference in your Retirement Nest egg.
Parents > Teach your children about the importance/power of Compounding!!
Person A contributes $2,000/yr. for the 13 years (between 18 and 30 years old)
Person B contributes $2,000/yr. for 38 years (between 31 and 68 years old)
Person C contributes $2,000/yr. for 51 years (between 18 and 68 years old)
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