Time: A Young Investor’s Friend

In yesterday’s post, Making and Taking Time to Teach Children, I talked about how important it is to pass on history, experiences, and life lessons. Occasionally, I spend time talking to my nephew about savings and investing and I want to elaborate a little more on that.

My Story

I was contracted with a major insurance carrier and their presentation included a demo of the Rule of 72 and it blew my mind. Essentially, it shows you how often your money will double, based on an given interest rate (rate of return). It was discovered by Albert Einstein who called compound interest the eight wonder of the world. My second training session was with my parents. When my trainer asked, have you ever heard of the rule of 72 and my mom said yes, I had to fight my jaw from dropping open. She said she and my father first heard it over 25 years ago. I can’t help glancing back periodically and wondering how different things may have been if my parents shared with me the Rule of 72, more than 25 years ago when they first learned it.

So, what I don’t want to happen is for the young people in my life to turn 40 or 50 and discover this from someone else. Statistically, right now, they have an advantage that I don’t have- time. So, this is what I try to reinforce to him periodically and maybe you can start sharing it with the young people in your life.

An Illustration

At 18 years, saving $1000 until they are my current age (53) would look like this:

If they hid it under the floorboard in the back of their closet, it would remain $1000.  

If they put it in a traditional savings account with a

generous 1% interest rate, it would grow to about $1388.

If they put it in a mutual fund (or some other vehicle), with an average interest rate of 10%, it would grow to about $23,225.

If they start with $1000 and continue to invest $83.33/month (which is about $1000 year), every year, they would have $245,467.

If they raise that annual amount as their career grows and income rises, they could (very probably) be a millionaire before they reach retirement.

There are no guarantees on the returns, but investing is a time tested and proven means to grow your savings. Rates rise and fall, but with a little education on what to look for and/or with the help of an investment professional, you can reap way more positive years than negative years. 

Young people have at added advantage. They can take more risk, which translates into bigger returns, because they have the time to ride out a downturn in the economic market. They don’t need to live on those investment monies because they are still working. That buys them some time to recover.  As they (and we) approach retirement, we’ll take less risk, in exchange for lower returns, because we don’t have the time to ride out a downturn- especially a major downturn.

Conclusion

This is the type of information that most African Americans didn’t grow up learning. They didn’t teach in our schools (not even in our colleges). And almost nobody was (or is) talking about it in their family. Either people didn’t know about it or it was taboo to talk about money. 

Those kinds of things are what keeps us in poverty, while the wealthy continue to prosper. This isn’t about greed or a prosperity gospel. It’s about closing the knowledge gap and accessing the same resources ad tools that others have been successfully using for decades.