Time: The Secret Weapon Of Investing
What a one-time investment of $1,000 can look like over time
A 25-year-old and a 50-year-old each invest a one-time investment of $1,000, earn a 10% average annual return and keep it invested until they’re 65 years old. Since 1926, the average annual return of the S&P 500 Index was 10.2%. For the last 40 years, 1980–2019, it was 11.2%.1 Over the course of 40 years, the 25-year-old would end up with $53,700. With only 15 years in the market, the 50-year-old would have $4,454.2 The difference is clear. Investing early, and allowing compound interest to grow, can pay off.
Source: Investor.gov Compound Interest Calculator, The chart above is for illustrative purposes only. Assumes a hypothetical 10% return average annual return on investment compounded monthly and does not take into account taxes, transaction costs, or market declines, For illustrative purposes only. The illustration doesn’t represent any particular investment, nor does it account for inflation.
What are the words you dread hearing from your boss? Some might say, “Can I have a word with you in private?” or the even more anxiety-inducing, “We need to talk.” What follows could be anything ranging from the worst news of your career to a casual invite to lunch. With the latter, you may wonder why on Earth they would choose to start the conversation in such an ominous way.
Likewise, if you’re planning to talk to your 20-something child who hasn’t started investing yet, the key to a productive conversation is how you start it. Many parents find themselves getting off on wrong foot, which effectively ends the conversation before it starts. Try these conversation starters to encourage your son or daughter to start improving their own financial future.
First, Things to Say
A direct approach, such as “You need to start investing,” can earn you an eye roll and a disinterested look. Try an indirect approach like this:
“Do you know why you have a huge advantage over me when it comes to investing?”
Starting a conversation with this question inspires curiosity. Your child will likely wonder how this is possible since they assume you’re more experienced and have more money to invest. But young people actually do have an advantage: time. And it’s the secret weapon of investing.
Your son or daughter may not realize the benefit of starting to invest at a young age, even if they only have a small amount to invest. Here’s how to help them see that each year they’re not investing is a missed opportunity for financial growth.
Share this hypothetical scenario:
A 25-year-old and a 50-year-old each invest a one-time investment of $1,000, earn a 10% average annual return and keep it invested until they’re 65 years old. Since 1926, the average annual return of the S&P 500 Index was 10.2%. For the last 40 years, 1980–2019, it was 11.2%.1
Over the course of 40 years, the 25-year-old would end up with $53,700. With only 15 years in the market, the 50-year-old would have $4,454.2
The difference is clear. Investing early, and allowing compound interest to grow, can pay off.
“Do you think you could ever be a millionaire?”
This question garners intrigue as well as some doubt. When it comes to finances, many 20-somethings are focused the short-term, e.g. paying student loans, affording rent, and enjoying living on their own. Becoming a millionaire probably seems far from a realistic goal—especially when they might be just trying to stay afloat financially. In reality, investing early and consistently can make becoming a millionaire probable. Use this scenario to explain why it might be more attainable than they think.
Imagine that a 25-year old begins investing $160 each month and earns a 10% return annually, in a tax-deferred account, until he or she turns 65. At 65, this investor could end up with $1,011,853.2 Furthermore, emphasize that investing $160 each month would become more manageable as he or she progresses through their career, and as their salary increases, that amount would likely grow, which could increase their overall return.
Becoming a Millionaire May Be More Doable Than You Think
Also, point out that if their company offers a 401(k) match, it may take even less out of their own pocket to reach $1 million. For example, imagine that same 25-year-old invests just 3% of their salary in their company-sponsored retirement plan, which ends up being just $80 a month. If the account grows at 10% average annual return, by age 65, they’d reach $1 million.3
Your son or daughter may get excited about what’s possible as a result of investing consistently over time. For many, just seeing what’s attainable is the motivation they need to start working toward their goal. Now that we’ve covered how to start your conversation, let’s discuss some of the challenges parents tend to run into when discussing investing.