Teenagers and college students seem to get the short end of the stick in many ways. But the job market this year — with so many employers having trouble getting workers — spells good news for young workers.
Savvy parents and grandparents can leverage this situation — more jobs available, higher starting wages and even occasional signing bonuses — into an important long-term teaching opportunity.
Ideally, your child or grandchild can benefit mightily from a handful of investing lessons.
And with so many young people earning thousands of dollars a year, you can help them learn lessons like:
Pay yourself first.
Start when you’re young.
Choose investments wisely.
Use an easy recipe for financial magic: compound interest plus lots of time.
Seek a match to double what you save.
Here’s how it could play out this summer.
Let’s assume you have a grandson who’s earning $3,000 this year, and that he does not absolutely need all of it right now.
At your urging, he sets aside $300 for his long-term future.
Already he’s made sure he “pays himself first” so that there’s something left over. And being young, he’s started very early.
Then, again at your urging and with a bit of basic education thrown in, he chooses an asset class that should help his money work hard for him over the coming decades.
Naturally, you tell him to invest in stocks instead of bonds and to invest in index funds instead of the individual stocks that fascinate his friends. Small-cap stocks, you teach him, have above-average expected long-term returns; you assure him he will eventually be happy he made that choice.
He trusts you and so he does it.
This grandson undoubtedly understands basic mathematics, and you get him to do a few computations about what might happen to that $300 between now and the time he’s 70. (That’ will probably be a common retirement age 50 years hence, though of course nobody knows.)
With a few minutes, a calculator (actual or online) and a notebook, he gives you a very startled look. Can this be true?
By earning 12% compounded annually (a reasonable expectation with small-cap stocks), his $300 could grow to $86,700 in 50 years.
That of course seems like an improbably high amount, and you give him a lesson on the topic of long-term inflation. If he reduces his compound return expectations by 3%, that will bring his projected future riches down to earth a bit.
But the result is still amazing: In today’s dollars, the $300 he sets aside this year will have purchasing power of around $22,300.
Compared with his $300, that’s a whopping amount of money.
By now, you’ve got his attention … and he’s off on the right foot. And along the way he has learned a bunch of valuable lessons.
There’s more, too.
You’ll want him to realize that when he gets a full-time job, some employers will match part or all of the money he sets aside from each paycheck. If he can get a deal like that, he should take it.
“Look for a way to get your money matched,” you tell him. If the two of you have a good enough relationship, maybe he’ll even suggest that you match his $300.
Astoundingly, that could eventually make his $300 worth $44,600 in today’s dollars.
Even if he does not bring up this topic, you could offer to “loan” him the $300. “Pay me back over 10 years, $30 a year,” you can suggest.
For him, that could eventually turn out to be an incredibly profitable bit of borrowing.
For you, investing a bit of time and money in his future could be an enormously valuable gift, especially if he continues this the following year and discovers how easy it is.
If this works out over his lifetime, it could change his life. Perhaps he will do something like this for his own kids someday. (I did this for my own children, and they are now doing it for theirs.)
For a final lesson, introduce him to the Roth IRA. Whether $300 goes into it or $600, those future earnings will never be taxed. That alone could be worth many times this year’s contribution.
Along the way in this process, give him a free copy of We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement.
For more on this whole topic, I’ve recorded a podcast called “How to build a $100 million retirement investing $500 a month.”
Richard Buck contributed to this article.
Paul Merriman and Richard Buck are the authors of We’re Talking Millions! 12 Simple Ways To Supercharge Your Retirement.