Let’s face it, often our spending today comes with huge debts and monthly payments in the future, and they’re the biggest killers of our dreams and financial freedom.
So how do we avoid those debt traps for our kids? 85% of teenagers never take a course on credit or finances. That means they haven’t got much of a hope of being financially successful from the get-go.
The first thing most teenagers do when leaving the home is to take on a car payment, get a credit card, pay rent, and often have a student loan. But if you have teenager that’s about to leave the home, here’s a deal you can make that’ll insure their financial freedom for the rest of their life.
If the deal works out, they can spend every dollar the make for life. All the credit card debt, the cool car and whatever, because they’re already rich! Your teenager can spend every dollar they earn for the rest of their life – anytime and any amount.
Sounds irresponsible? Not at all – because that’s only half of the deal. The other half is that in order to do this, the only thing your teenager has to do is to save $10,000 by their 20th birthday. Nothing more – nothing less. After that, without getting into debt, or touching these savings, they can literally spend every dollar they make.
It’s the magic of compounding and works with something called the Rule of 72. It’s critical to know this, and to use it to your advantage, no matter what your age. Simply take your rate of return and divide it by 72 – that’s how long it’ll take for your savings to double. So at a 7% rate, it’ll double every 10 years, while a 10% rate will double it every seven years.
Do some lateral thinking of how you can achieve this. Maybe you can charge them rent and keep that in a savings account for them. Some people match whatever the teenager saves to a certain amount. There’s all kinds of ways you can make them focus on it and make it happen.
Why can’t we this as adults? Simple: Because we didn’t save the money when we were younger. The longer you wait, the less time our money has to double up and double up again. If we want the money when we’re 65 years old and start saving at age 50, our savings will only double a couple of times, so we have to save a lot more.
But your 20-year old just has to sit back with all the time in the world and watch his or her savings double again and again until it reaches $1.3 million at age 67, using a 10% rate, and it all started with a one-time saving of $10,000.
Oh, if only we had done this when we were their age. But one more thing: Because they’re teenagers, I’d recommend there’d be two signatures on the account – just in case they get the urge to take some money out…
The Rule of 72: At 10% it’s 72 divided by 10 = money doubles every 7 years
At 11% it’s 72 divided by 11 = money doubles ever 6 ½ years
At age Amount now saved through compounding interest just at a 10% rate
THAT is the best graduation present I can think of, and it’s not hard to do at all.