With being a parent, I feel great responsibility to teach and ensure that my kids don’t make some of the same mistakes that I made when I was young. I will admit, I was a pretty good kid growing up, but you can’t get everything right. My mom was a banker and my dad was in insurance, so with hearing about finances and risk growing up you would think my finances would have been in order by age 20 right? Not quite!
It took years to really learn and appreciate the world of finance with both the pain and great success that it can deal out to you. I have a 16 year old son and a 12 and 9 year old girls. They are my world and I want the best for them. My son is starting to get to the age to where I feel compelled to begin the process of shaping him for the real world. I mean he is driving and he recently got his first job. He has to understand some things about the real world.
In steps super finance obsessed parent (me) with a plan. So it’s really simple and the earlier that you start this in life, the more you will achieve with this easy method to build wealth. It’s not rocket science, but it amazes me how many people just don’t learn more about this until it’s too late.
So here is the deal. Let me show you the financial power of compound returns on your money invested in the right places. TRUST ME, you will want to read on, especially if you have some time before you retire.
So like I said my son is 16 years old. This is a very modest investment and growth chart that I put together. It makes some fairly conservative assumptions here as well at only 10% growth per year. The average investor should expect 12% return on mutual funds over a long period of time. This is bench marked by the average return on investments on the S&P 500 over the greater part of the last 100 years.
I told him to consider making a $1000 investment into a good growth mutual fund when he turns 18 and continue to invest just $1000 a year each year after. By the time he is 50, he would have easily grew that money to be $222,252. Almost a quarter of a million dollars!! Simple right? Less than a $100 a month. You could do that right? (See the growth chart below for the details behind the number)
So this is where things get interesting. Let’s say you were able to do better than 20% a year. This past year my investments grew over 20%. If you continue to watch the performance of your mutual funds, you should be able to easily beat the average return.
$2,045,931 before the age of 50!!! WOW! Just by tossing a $1000 into mutual funds starting at the age of 18 made you become a multi-millionaire before the age of 50. It really is that simple folks. You just have to remember to start on this pathway early.
So now that I have this model built to determine how your money might grow, I thought I would show some other alternative plans and get a little crazy.
Here I modeled the idea that if I took $1000 to start and increase the contribution by $1000 each year. So that means $1000 in the first year, $2000 in the second year and so on. Given the fact that as you grow in your career, you will likely be more and more capable to increase those investments as you get older. Here is the result to the right.
$12,110,588 by 50 WOW! Mega Rich right? Just keep in mind that I didn’t do any smoke and mirrors or magic here. This is just basic compound interest on your money invested in some good growth mutual funds over a period of 30+ years. This is all in your reach! At the end of the day, you should be able to find way to lock away $100 a month by the time your 18 to begin a solid retirement strategy.
The earlier you begin this process, the earlier you will be able to retire and the more money you will have to enjoy life with when you get older. Start this process now and if you have kids, be sure to show them the way too! They will thank you much later in life by making these smart decisions when they were young.