I remember when I was a sophomore in high school our history teacher brought in a local financial advisor to give a 10 minute presentation to us about the power of starting to invest early and that 10 minutes really resonated with me. If presented the right way, just a short explanation can really go a long way. So I want to share with you the most impactful bit of information you can use when speaking to a younger person about investing.....And it's a very simple message...
PAY YOURSELF FIRST & GET STARTED EARLY
When I say "pay yourself first", I mean earmark a portion of your income to savings/investments before you even think about what to spend your money on.....Treat it like a non-discretionary expense. Automate it so it's out of sight, out of mind. If a young person makes $1,000 a month at a part-time job, encourage them to set up an automatic $100 deferral straight into a ROTH IRA. If we wait until the end of the month with the idea that we'll just save whatever is left....well oftentimes we spend the entire amount on "stuff" and have nothing left to invest. But if you pay yourself first.....You never miss a month. As you begin to make more money, increase the amount you pay yourself first. After awhile, it will become second nature and all of a sudden you're a serial saver and on the pathway to financial independence.
Now the second half of the message is "get started early". And this is where we can use math to really plant the message. Simply stated, the earlier you begin, the better off you'll be. Let's take a look at an easy example of the power of TIME & COMPOUNDING.
Let's say a 22 year old decides to start saving $500 a month into a ROTH IRA and is going to continue doing this until the age of 65. We'll also assume an 9% average rate of return.
At age 65, the math looks like this:
Total Contributions: $258,000
Total Growth: $2,825,670
Total Account Value: $3,083,670
Now let's say instead that same 22 year old thinks "hey I've got plenty of time to start investing....I'll just enjoy my money now while I'm young and start saving later". So instead of starting at age 22, they start at age 32. Using the same assumptions as above, but starting 10 years later...
At Age 65, the math looks like this:
Total Contributions: $198,000
Total Growth: $1,020,473
Total Account Value: $1,218,473
The math speaks for itself....Despite lifetime contributions being just $60,000 less in the second example, total account value is almost $2 MILLION lower. For that 35 year old to accumulate $3 million by age 65, they'd actually have to increase their monthly contributions to $1,300 per month vs just $500 per month if starting at age 22.
But at age 32, we're probably now buying a house. We're starting to have kids. We're feeding more mouths. We have to buy a bigger car. Life becomes much more expensive in your 30s so it could pretty difficult to just start saving $1,300 a month at that stage of life. But if someone had started paying themselves first at age 22, they're accustomed to that $500 "expense" and it's not really even something they think about. They've already built a budget and a life that accounts for that. It's automatic so it takes care of itself and eventually it will take care of their entire family.
And the longer they wait, the more difficult the math becomes. If someone waits to start investing until age 42, they'd need to save $2,700 per month until age 65 to get to $3 million. That's a tall order.
And here's one more way to really illustrate the power of compounding over the long term...
Assuming a 9% average rate of return, every $500 saved at age 22 would be worth $30,000 by the time they reach 65. So in a single year, if a 22 year old invested $500 per month for a total of $6,000.....That $6,000 would be worth $371,000 by age 65. If you understand that you're not just paying yourself $500 each month but that you're paying your future self $30,000 per month....Well that's a pretty compelling reason to start investing.
The power of compound returns is one of the strongest forces on earth and one of those important factors in how hard that force is going to work for you is TIME. So teach that younger generation toPAY YOURSELF FIRST AND GET STARTED EARLY. This simple message is literally worth millions.