When my niece turned 18, I decided to give her a million dollars!!
You must be thinking “Wow, it must be nice to be related to you!” Let me tell you how I pulled this off.
When my niece turned 18, I wanted to give her something BIG. It’s something I wish my parents had gifted me. The gift is KNOWLEDGE.
Like most teenagers, my niece knew NOTHING of investing for retirement. She didn’t know what a mutual fund was, or even what a stock was. She didn’t learn about investing from school, her parents or her church. She was like most of us at that age…underexposed and uneducated.
So, my wife and I took $100 and put it into an individual retirement account (IRA) in her name. Specifically, we opened a special kind of IRA, a Roth IRA.I told my niece that if my parents had set me up with one of these IRAs when I was 18, I’d be well on my way to having millions of dollars set aside for my retirement. But alas, my parents were like most middle-class parents in the US: they don’t teach their children about money. My hope is that by starting her retirement account and encouraging her to contribute a small portion of her own salary, she would start to see her money grow in a just a few years. After a few years of watching money grow, all on its own, she will have a positive personal experience with retirement investing, which will turn into a life-time habit. That life-time habit will then turn into a huge sum of money, which will allow her to retire in financial comfort.
Why do you need a huge sum of money by the time you retire? Because you will still have bills to pay once you stop working. You’ll still want and need to spend money when you stop getting a paycheck from an employer. And we all know that social security won’t be enough to live off of. Therefore, we MUST save our own money and provide for our own retirement.
So, the next question you might have is, HOW WILL MY NIECE’S RETIREMENT ACCOUNT of $100 GROW TO MILLIONS OF DOLLARS?
There are TWO important things you must do once you have a retirement account. First, you MUST put money into it. Second, you must make INVESTMENT CHOICES.
Step one, you must put money into your account. Money advisors suggest that every time you get paid, you should put 10-20% of your income aside into savings. What they really mean, is that you should put 10-20% of your income aside into LONG TERM savings. It gets no more long term than retirement. This is difficult for many people to do. It takes great discipline. But it’s a surefire way for average Americans to gain significant wealth.
Step two, you must make investment choices. Generally speaking, retirement investments are in company stocks or mutual funds. If you’re not familiar with how stock investments work, here is a quick explanation.
Public companies such as Starbucks, Apple, Amazon, Home Depot, etc., raise money to grow their businesses by issuing shares of stock. A share of stock is a certificate that proves ownership of that company. In this case “share” means “portion” and “stock” means “ownership.” People who own shares are called “shareholders.” When a company makes profits, two things can happen. First, some of those profits can be given to the shareholders. Second, the value of company goes up, which in turn makes the value of owning the company go up. This causes the cost of a share of stock to increase.
20 years ago, Starbucks stock sold at $2 a share. If I had taken $100 to purchase Starbucks stock, I would have been able to purchase 50 shares. Pay attention, because what I’m about to show you is how investment magic happens. And it’s how average people can become rich. Today, 20 years later, Starbuck’s stock price is roughly $56 a share. Which means, that in just 20 years, my $100 investment is now worth $2,800!!!
$2,800 isn’t enough to retire on. In order to have enough money to retire, you’re going to need two key ingredients: TIME and HABIT.
The first ingredient is TIME. If you start investing when you’re young, time is on your side. When investments grow, they grow because of compounding interest. I don’t have time to explain compounding interest, but let me illustrate my point with this question: who do you think would have more money when they turn 65 years old, someone who started saving and investing when they were 18 years old, or someone who started saving and investing when they were 50? Exactly, the person who started when they were 18. And you know what, the person who started when they were 50 will be much better off than the person who started when they were 60. The point is, whatever your age is now, start today. The longer you invest and the longer your income grows, the more money you will make
The second ingredient is HABIT. A one-time investment of $100 at 18 years old will NOT get you $1,000,000 by the time you are 65 unless you get lucky. No, the way you will get $1,000,000 by the time you’re 65 is by making a habit of investing money. The more you invest, and the more often you invest, the more your money will grow. A good rule of thumb is to invest a MINIMUM of 10% of your income. If you want to have serious money in the bank when you’re older, you should put aside 20% of your income every month.
Let me describe a hypothetical situation.
At 18 years old, you’re probably only making minimum wage. Let’s say you’re working part time at 80 hours a month. 10% of your income will be around $65 a month. That’s what you put into your IRA. When you’re 25 years old, you will hopefully be making more than minimum, and you will probably be working 160 hours per month. 10% of your income might be $200 a month. And by the time you’re 30 years old, 10% of your income might be close to $300.
If you save $300 a month and your conservative mutual fund grows on average 6-7% a year, you’ll have over a million dollars in your IRA when you turn 65 years old. (If you want to play around with the math to see what various investments will be worth over time, check out this retirement calculator HERE.
My hope is that my niece will see this small investment of $100 grow in the next couple of years. As she sees it grow, my hope is that she will be encouraged by the growth and then motivated to continue to put money into her savings account. I hope that by starting the habit early, won’t see the money she sets aside as a burden, but rather as an opportunity. In fact, I really hope she sees it as a priority. By teaching her the basics of investing and nurturing the habit of saving, she will be on her way to having a comfortable retirement, hopefully with much more than a million dollars. Enjoy!
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Trevor Ward, a contributor to this blog, worked as a product development engineer at Mattel Toys right out of college. He is also an entrepreneur and business owner. He is an award-winning documentary filmmaker and had impacted audiences from all over the world. He met the most beautiful woman in the world and they got married. Now Trevor had embarked on another face of his career to become an attorney.