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.
The only thing your teenager has to do is to save $8,000 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. 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 help them achieve this. Maybe you can charge them rent and keep that in a savings account. Some parents match whatever the teenager saves to a certain amount – there are all kinds of ways.
Then your 20-year old just has to watch his or her savings double again and again until it reaches $1 million at age 67, using a 10% rate, and it all started with a one-time saving of $8,000.
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 at a 10% rate
THAT is the best graduation present I can think of, and it’s not hard to do at all. It works with any starting amount. Even if it’s $5,000, it’ll turn to $640,000 and that’s not a bad deal for a year of two of savings at an early age!
Adults can get there, too. If you want to have $1 million when you retire at age 67, for example, you just need to work backwards.
So at age 60 you’ll need half a million because it’ll double when you reach 67. At age 53, you’ll need $250,000 and at age 46 you’ll need $125,000, and age 39 you’ll need $63,000. When you reach any of those amounts, at whatever age, it’ll double and double until you reach a million at age 67. But, depending on your age, you may want to use a more conservative 7%, depending on your age in order to lower the risk of your investments.
However, there’s a big proviso: It’ll never happen if you’re also in debt and making a bunch of payments. Sorry, can’t be done. You need to be debt free to have some serious money to put away for investments. I know the world has taught you that you can have it all – it’s not true. There’s no chance you can save a little, pay a little here and there and still have a life with your normal rent, mortgage, utilities, gas, etc. I know you think you can and it’ll be another five, 10, or 20 years of finding out that you were really wrong and wasted another decade.