Q: What is the best financial gift for a young worker?
A: Teach them to save as much as they can now.
Here’s a lesson for your adult children and adult grandchildren: It’s easier to save $400 per month toward retirement than to save $6,000 per month. To save something out of every paycheck might be the hardest thing a young person can undertake. The reward, however, is a more secure retirement with greater financial independence.
Here’s the math:
- A 25-year-old worker who wants to accumulate $1 million by age 65 (earning 7% annually) needs to invest $381 per month.
- A worker who delays investing until age 55 must put away $5,778 each month from age 55 to 65 to get that same $1 million.
It’s all about the compounding of gains: The longer the time frame your money can grow, the less money you will need to invest. Let me draw another picture for you. If from age 25-35 Katie makes monthly deposits then stops but her brother Justin waits until age 35 to put the same amount away each month and does so for 30 years (until his age 65), Justin’s account value will never catch up to Katie’s account even though Justin invested for 30 years while Katie invested for only 10, assuming they each earn the same annual return each year.
Even if a young worker can’t save an ideal amount right away, they will have an easier time reaching their long-term financial goals if they begin saving as much as possible out of every paycheck and increasing their savings rate as their salary increases. The worst move is to wait until later in life to start saving.
Encourage your children and grandchildren to live within their means and invest something out of every paycheck. Let the wonders of compound earnings over time help them become financially independent. This will be a gift far greater than any amount of money you may give them!
For more insight, listen to Jentner Wealth Management’s weekly podcast by clicking here. Or download Jentner’s white papers on The Four Cornerstones of Prudent Investing and The Active Versus Passive Investing Debate.