Looking back, would you have benefited from a true understanding of a few key money concepts a little earlier in life? Most of us were taught to save and to give through doing chores or dropping money in the offering plate. While these principles are great, they don’t often lead to wealth or the ability to leave a legacy as most of us strive to do.
Now consider the younger people in your life like your children or grandchildren. Whether they’re raking leaves for cash, landed their first job out of college, or are a parent themselves — sharing your wisdom in a manner that sets these people up for success later in life is a gift they’re sure to appreciate more and more over time.
If you agree some extra money sense would have been useful earlier in life, consider sharing your wisdom with the next generation. We hope these classic principles and examples help you reflect on your current financial efforts and help to start a conversation with someone you care about.
Lesson 1: Pay Yourself First
Wealth, more often than not, doesn’t have to do with an inheritance, trust fund, parental support, or winning the lottery. “Fidelity Investments found that 88 percent of millionaires are self-made. Only 12 percent inherited significant money (at least 10 percent of their wealth), and most did not grow up in exclusive country club neighborhoods. The majority of millionaires went to college and are married or partnered.”
For most of these millionaires, the road to financial freedom meant working, saving, living within their means, and investing. Principles we’re nearly all capable of. Are you nodding your head? A great way to teach this mentality is by using the concept of paying yourself first.
When paying yourself first, you take a portion or percentage of your paycheck and put it directly into savings. From there, you live on what remains — groceries, bills, entertainment, etc. When you pay yourself first, the savings actually happens. Many try to do this in reverse and save what’s leftover at the end of the month, which more often than not, is little to nothing because saving wasn’t prioritized.
Sharing the idea is one thing, but providing clear steps is what often leads to real action. Here are a few ideas:
Make the transaction: Automation is the name of the game, especially for younger generations. Teach the concept of automatic transfers to put their savings on auto-pilot.
Put your money somewhere safe: Consider utilizing a savings account at a bank not tied to any debit or credit cards. Accounts between different banks can be easily linked, making transfers easy. But at the same time, the transfer is not instantaneous, meaning you’ll have time to think before transferring money out of savings, helping limit impulse purchases.
Adjust accordingly: Get a raise? Bump up your savings. This will teach a person to live within (or even under) their means. Unforeseen circumstances? Think twice. There’s a difference between a need and a want. The savings are there to use when needed and can help a person avoid debt.
This lesson is suited for all stages of life. The earlier this is learned, the larger the impact later in life. And we all likely fall off track at some point in our life, but it’s much easier to rebound when we have these principles to fall back on.
Lesson 2: Compound Interest
With time on their side, sharing the effects of compound interest with a young person can quite literally change the trajectory of their life. A true understanding can also bring positivity and excitement to a sometimes dreaded savings talk.
To put it simply, compound interest is when your initial investment plus any interest earned are reinvested to make additional gains. Your gains are put to work to help you make additional gains.
While trading time for money is a concept everyone understands, compound interest puts your money to work for you. Explaining compound interest is best done through examples — after all, seeing is believing. And someone young, with little savings, may have a hard time grasping the true power if they have their money in a savings account earning less than 1% interest.
Example 1:
For a simplistic overview, if you have $1,000 in a savings account earning 1% interest, your first interest payment will be $10, making your new balance $1,010. If you leave your money in the account untouched, next year your interest payment will be 1% of $1,010 or $10.01 and so on and so forth.
Because savings accounts today see such little interest, you can also introduce the concept in terms of investing and apply the compound interest principle to the returns seen in an investment account. Of course, you’ll need to explain that returns in the stock market are not fixed or guaranteed in the way they are with a savings account.
Example 2:
A new graduate enters the job market to make $45,000 per year. If they put 5% of their earnings into an investment account making an 8% return, they’ll have stashed away $2,250 and earned an additional $180 after one year.
Continue this trend for another 10 years and they’ll have put away $24,750. And at an 8% annual return, the account will grow to $37,452.35. At 10 years out of college, that’s a good base to build upon.
Example 3:
Let’s say you put that $37,452.35 into an IRA and dedicate yourself to contributing $6,000 per year, in the form of $500 per month deposits, for 20 years, and see an 8% annual return. This person will have contributed $157,452.35 over the course of 20 years, but the account will have grown to $479,030.55
While prioritizing $500 per month takes diligence and consistency, $321,578.20 was made over the last twenty years in passive income thanks to the principles of compound interest and returns.
Image source: investor.gov
Building Wealth for Retirement
In these hypothetical examples, around age 52 the individual is well on their way to the $500K mark. It’s this point when it becomes important to review all of your options to grow that $500k into a real nest egg to confidently retire with.
With approximately 10-15 years to go, time is still on their side to see large gains thanks to the good start they made when first entering the workforce. At Integrated Wealth Management, we have one goal: to provide trustworthy financial management services that allow our clients to meet their goals with confidence.
We hope these examples make starting a conversation with a loved one a little easier. At the end of the day, we understand you want your loved ones to be good stewards of their money, living happy and successful lives of their own.
So who do you have in mind? Is it a grandchild helping out with household chores? Or possibly a child entering the workforce? Or maybe they are a little further along with a family of their own? Maybe the person with a good start, eager to reach their retirement goals is you? Whatever stage you’re in, we’re here to help when retiring with confidence becomes your priority.
Sources:
https://money.usnews.com/money/blogs/on-retirement/articles/7-myths-about-millionaires
https://www.investor.gov/free-financial-planning-tools