Teach Your Children and Grandchildren:

Save Early and You Won’t Have to Save More

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Among the most common refrains I hear from clients is, “We were never taught this stuff in school,” or “My parents never taught me about money.” For most of us, this is a truth-bomb extraordinaire.

Another truth is that time flies; it gets away from us. And that “saving for a rainy day” we promised to do never happens because we’re busy with this thing called life. The third truth I’m re-upping today is the miracle of compounding; that our money, when placed in the right market instrument, grows over time. If, for the purposes of this exercise, we assume that our invested money grows by 7.2% each year, it will double every 10 years. (For more on compounding, see my January 18 post, “Hacking Longevity Bit by Bit.”)

I’m not going to get fancy here because clients and financial professionals alike tend to overcomplicate investing. When financial planners refer to “the market,” we are largely referring to the S&P 500, an index of U.S. Large Cap companies. It is reflected in growth mutual funds, index funds and exchange traded funds. And it’s not unreasonable to expect a 7.2% growth rate of that index over time.

Let’s fix the problem of education right now, shall we? Let’s give our children and grandchildren a simple tool to help them feel less desperate and more hopeful about their financial futures. Let’s also teach them and ourselves how to save.

Here’s what you can tell them: 

“If you have a part-time job every year from age 16 to age 21—while you’re living at home and going to school—and you save the maximum amount into a Roth IRA ($7,000 in 2024) invested in the S&P 500, you will have approximately $1.6 million by the time you are ready to live off your savings if you leave it alone and don’t touch it. That means once you enter the full-time workforce, you’ll have the ability to spend your money on other things, like building an emergency fund, saving for a car, and buying some cool kicks.”

Need proof? I have proof!

Total = $1,627,543.06 available at age 72 (tax free)

There are plenty of tools available to help you calculate these numbers, but I’ll choose the easiest because not everyone loves spreadsheets. And it would be awesome if you started to play with these tools.  I went here and, using the compound interest calculator, plugged in the following numbers: 

·       Initial investment: $7,000

·       Monthly Contribution: $0

·       Length of Time in Years: 55

·       Estimated interest rate: 7.2%

·       Interest rate variance: 0%

·       Compound Frequency: Annually  (Note:  More frequent compounding results in even more money.)

I then repeated the exercise five more times, reducing the years of compounding by one each time.   

Aside:  You can use the same calculator to estimate how much you will have if you make weekly or monthly contributions, but I’m going for simplicity here.

By starting early and putting away a nest egg for the longest possible time horizon, your kids and grandkids will be able to maintain an emergency fund and save for their lifestyle and their kids, all the while knowing that there’s a lovely pot that will be accessible later.

The simple fact is that once kids learn to save, they learn to love to save, and increasing balances provide excellent positive reinforcement. So, what if the first $7,000 every year after age 21 went to a savings goal, or a 401(k), or continued to go to a Roth IRA? How much more wealth will your grandchildren be creating for themselves and their families?

I know what you’re thinking: “I’ll just give my children $7,000 a year to deposit.” Stop, stop, STOP!  If that’s your plan, you’re missing the point because the kids need to learn about money. (Remember, that’s the initial problem you brought to my doorstep.) Giving them money is never as satisfying to them as what they accomplish on their own. Also, in order for the money to grow tax free forever, it must be documented as income.  Otherwise, they’ll share a big hunk of that $1.6 million with the IRS.

Let’s move on to a bigger elephant in the room: “What if I haven’t started saving yet and I’m a lot older than 21?” OK, let’s change the age numbers and teach ourselves—and our kids—to start where we are now. Stop making yourself wrong; we have mothers for that.

Roth money is the last money anyone wants to spend in retirement because it grows and distributes tax free. If you start at 26 versus 16, who cares? Chances are, this is money you won’t spend until you are 81, not 71. And if you start at 56, the doubling is still happening, and you will have three opportunities to double your money by age 86. In other words, think of the money you save today for the furthest time horizon, and that will allow you to allocate the smallest amount you need to save to achieve the greater goal.

Remember, you have #MoreRunwayThanYouThink.

When we save early, our money works hard for us. When we save late, we work hard for our money.  The gift we can give our children and grandchildren is teaching them to save early so they don’t have to save more. #WeRescueOurselves

© 2024 Madrina Molly

The information contained herein and shared by Madrina Molly™ constitutes financial education and not investment or financial advice.

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