How a $100 gift to a teen could make an $116,000 difference!
The first lesson most children and teens learn about money is what they can spend it on – games, the latest tech, their own iPad - but it’s a parent’s obligation to also teach them about managing their money.
The earlier we can teach them about the power of compounding, the more they will thank us down the track!
The magic of compounding
Compounding can be the road to riches and anyone can do it. All you need is perseverance to stay on the savings path and the intelligence to understand what is happening.
Compounding is earning interest on your interest. The more money you accumulate the larger the return each year.
There are two catches. First, it involves sacrifice. You have to give it up. Have you heard of the marshmallow test? Give up one marshmallow now- and receive two later? That’s the idea, sacrificing the now for a bigger return later…
And second, willpower- you cannot spend it! The second you do all your hard work goes down the drain. And also.. its boring… like watching grass grow boring…. At least it is until the balance starts to increase more and more over time and then it becomes super exciting!
Heres a case study!
“Jessica” began a savings program at age 17 starting with a $100 from a birthday gift from her grandmother.
Jessica was wise and also sympathetic, she would listen to the stories her parents told her of their own financial struggles and sacrifices and took note of the importance to ‘save for a rainy day’ she cleverly choose to save her gift and also put away a total of $1,500 each year (from birthday gifts, Christmas gifts, some from her allowance also adding a portion from her part time job.
She lived her life but continued to save all her cash birthday gifts, and bits and pieces from her allowance and job.
She continued to save with this conservative amount of $1500 per year for 13 years..
Lets assume the fund earned an average 7% a year. (Term deposits and cash savings are currently below this rate, although other investment funds can achieve this)
At age 30 the balance of her fund was $30,450.
Jessica now STOPS adding money to the account.
On the other hand Jessica’s twin sister “Charlotte” was having wayyyy too much fun at 17 spending every dollar she earned and was gifted. She delayed saving or making a plan until she reached age 30 – just when Jessica stopped. She didn’t really consider the advice she was told by her parents and never saved for a rainy day..
So at 30 starting with $100 Charlotte deposited $1,500 per year and maintained that amount every year until she reached age 65 and retired.
Her fund also averaged 7% p.a. and 35 years later Charlotte ended up with $208,423.
Amazingly through the power of compounding, Jessica, who hadn’t added anything to her fund for the last 35 years has $325,123 in her account – over $116,000 more!
The 13 years that Jessica saved ( half of which while she was young and at home) were worth more than all of the 35 years in adulthood that Charlotte saved!!!!
A small cash gift, along with Jessica’s wise choices, delayed gratification and a lot of time can make a $116,000 difference!
That’s compound interest!