Many young people have recently graduated, started earning money, and are faced with a wide range of new financial choices. The financial principle I most hope young people learn early is how important it is to start saving early, especially for their retirement. Saving early, even a small amount, allows more time for the “magic of compound” interest to grow your savings and earn interest on your interest.
One example: saving $250 per month starting at age 24 and earning 8.5% return will make you a millionaire at age 65 in time for retirement. Some people may focus on the length of time this takes, but the real issue to note is that waiting just ten years to start saving means you have to DOUBLE the amount you save to reach the same goal. Reaching a savings goal is a combination of amount saved, length of time, and rate of return.
So in addition to focusing on the savings amount and importance of starting early, you should also focus on your rate of return, the greater the better. In our example above, note that you need a rate of return averaging 8.5%. This cannot be achieved with mostly conservative investments in bonds, CDs, and savings accounts. It requires keeping most of your long-term investments in stocks even when they go up and down. The easiest way to do this is with low-fee ETFs, index funds, and target date funds. This is true whether it is thru your 401(k), IRA, or regular online broker account.
The final principles to keep savings on track is to “pay yourself first” and make it automatic. This means to automatically save by diverting savings from your pay check or bank account to your savings accounts and do it before you budget what is left for spending. Make your savings goals an equal priority with other spending.
What Young People Should Know about Money? Notice the key financial principles here that we have repeatedly discussed:
- Start saving early and steadily.
- Get a good rate of return, which can best be done with steady investing in stocks or low fee ETFs and index funds.
- Use the magic of compound interest over time rather than huge savings amounts later to reach your goals.
- Make saving automatic.
See for yourself how your savings stacks up with internet calculators that you play with the input variables and instantly see the results. I love the Dinkytown.net calculators. They seem to have every kind imaginable. Explore their savings calculators including “how long will it take to become a millionaire”.