-- Albert Einstein, Physicist.
Being a product of the public school system, I was never taught anything about money. Sure, I learned about spending money, but little if anything about income or wealth. Money was something you got from your parents to buy lunch or donate to the March of Dimes. In high school I got a job but all my money went to buy things that were considered a “necessity” for a teenager. The only things I learned about money all the way through college was how to spend it, not accumulate it. I’m sure my experience was not an isolated understanding of money. I believe this is about all most people understand about money or will ever learn about money throughout their entire life. For most individuals, income is relatively fixed at the value of their time as it’s sold to some company. Financial knowledge for most people is learning the best way of spending money -- looking for sales or clipping coupons.
What I should have been taught was the value of compounding my financial assets over time. I understand that it’s difficult to talk to someone in their teens about saving over a lifetime when all they care about is buying a used car and going to the movies, but it’s equally difficult to talk to a 50 year old who hasn’t saved a dime and they’re facing the misery of working well into their 70s and 80s in some minimum wage job.
Suppose I had gotten out of school and got a job that paid the median salary paid in the United States which is $50,000 per year. If I had only saved 5% of my pretax income each year ($2500) and invested that money in stocks that increased 8% per year, that account would increase to approximately 10 times the original $2500 investment in just 8 years and over 14 times in just 10 years (see below).
That account would be worth over $100,000 after twenty years, over $250,000 after thirty years, over $600,000 after forty years, and over $1.4 Million after fifty years. Even more important than this total amount of the account is the fact that the account would then be producing over $100,000 per year on it’s own.
Now I know that 50 years seems like a long time but this example is based on saving only $2500 per year. That’s just a little over $200 per month. That’s probably less than your family’s cell phone bill or your family’s internet/cable tv bill. That’s also a lot less than your auto bill. If you saved even more than this paltry sum of approximately $200 per month your account would increase exponentially faster. You would be a millionaire sooner and you would have the option to retire early.
One last thing. What if you could do this for each of your kids? The ones that are too busy being teenagers. Seems difficult, right? Well if you had done this years ago for yourself then your account would be producing huge amounts each year and you could be using those funds to fund their accounts. It’s this intergenerational funding and compound investing over time that really creates the wealth in this country. Young kids have the benefit of time. Adults should have the obligation to help their kids take advantage of this idea of compounding over time.
Take a moment and imagine the possibilities of all of this. Imagine the benefits of investing over time and the compounding effect on earnings. Investing this way is not gambling. it’s not the Lotto. It’s not the horses. It’s investing. It’s how wealth gets created. Wealth often takes more than one generation to create but it will totally change the futures of your kids and grandkids. It’s the essence of security, and options, and happiness.