There is one thing that we can do as a kid that gives us a MASSIVE advantage for later on. It’s a trump card that if used correctly, could yield millions of dollars later in life. That leading edge is investing early with compound interest.
A few days ago, I was very blessed to be able to contact one of the best financial advisory firms in the US, Creative Planning. At the head of this company is Peter Mallouk. His firm is run on a very high fiduciary standard, which makes it all the more exciting to get such solid advice. Through the contact, I was invited to submit 3-4 questions about money or investing, and Mr. Mallouk gave me some great answers.
Here they are:
Q: As a kid or teen, what’s the best thing we could do today that would yield the biggest advantage later?
A: Open a Roth IRA, and put your earnings from your part-time job (or any money you earn) in there.
Q: Are there any investing strategies different for kids than adults?
A: Buy all stocks – you have a long way to go to watch it grow.
Q: What’s the biggest mistake we could make as kids?
A: Missing the chance to start early.
Bonus Question: You mentioned a little bit about buying 1/4 shares of stock. Could you explain a little more on that, and maybe, give some examples?
Answer: The best option here is to go to TD Ameritrade and open an account and invest in the S&P 500. For now, that will be better than partial stocks.
The highlight of this article is the answer to question three: “The biggest mistake kids could make is missing the chance to start early.”
Just so you can grasp what this means, here are a few examples:
If you got a part-time job at the age of 14, worked 20 hours a week, at $7.25 an hour (minimum wage), that would give you $580 per month! If you invested $100 a month at a 10% rate of return (which is BELOW the market average), by the age of 65 you would have $1,691,315! Now, this example is a little off, because as you get older you won’t be making minimum wage (hopefully), and you will be able to contribute way more.
Here is another example. You are 21 years old, making $30,000 a year. You have $5,000 saved up, and you start to invest 15% of your income monthly, which is the recommended amount, and you reap a 15% return (You decided to take an investing class and learned Value Investing . . . lol, just a suggestion). By the age of 65, you have $18,471,052 MILLION DOLLARS!!!
This is not an unrealistic example. Now, it might be a little different if you’re 21 with $100,000 in debt – yeah, maybe a little harder. My goal, though, is to help kids be in a totally debt-free position by the time you are an adult, so you can invest way earlier and reap these amazing benefits.
Compound interest is all about the fact that you’re earning interest on not only the initial sum but also on the past interest earned. That’s what makes even a few dollars turn into millions. I know that’s a little confusing, so look at this example:
You invest $1,000 at 10% interest compounded yearly. After one year, you have $1,100. You have $1,000 plus 10% of $1,000 (which is $100). After two years, you have $1,210. After three years, you have $1,331. See, now it’s paying you money for the money you just earned AND your initial investment. That’s compound interest 🙂 .
Don’t think you will be going on this journey alone. As a kid, your parents or other adults will be able to help you with the basics, but when you’re an adult yourself I recommend you work with an advisor . . . but not just ANY advisor. It is very important to understand that there are big differences between different advisors. Tony Robbin’s book, Unshakeable, does a great job of explaining them. If you’re interested, here’s a link talking about it.
If you want to play around with it, Dave Ramsey has a great retirement calculator that I like to use. Ever wondered how much you would need to retire? Try here if you want to find out. It’s a little harder for a kid to use, due to the fact that most of us don’t have a steady income, but it’s fun to put numbers in and play around and see how it comes out (you’ll need an email account though).
Dave Ramsey also has an article on how teens (and kids) can become millionaires. He has a mind-blowing example of two kids who invested at different ages and the result is insane.
I can’t stress the fact enough to get started early . . . which means RIGHT NOW. If you are serious about wanting to start on this journey and are ready to take the next step, to start and fund an account, hit this link. (Link Coming) Also, if you would like to email me your questions, feel free to do so, and I will do my best to help.
The day you start investing is monumental. It’s something to put down in a journal. With lots of time, decent returns, and even just a few mediocre dollars, you can produce millions.
Until next time,
Terry D. Turner lll, 13-year-old and Founder of invest13.com