6 Steps To Raise Financially Responsible Children: Step 4

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It Only Takes a Few Dollars

When children are young they realize that just a few dollars can go a long way. This fundamental knowledge needs to be maintained as the prices of items children purchase become more expensive. It is important to teach your child that to reach her goals and dreams takes only a few dollars each day. And sometimes that means a few minor sacrifices along the way. Financial security can be built on a very modest income and saving money is much easier than you think. What it comes down to is knowing how you spend and learning how to spend less than you earn.

“What do you consider the greatest invention of all time?” – Reporter
“Compound interest.” – Albert Einstein

The most important aspect of compounding is to start early. Explain to your child that the younger she starts, the more she will earn. See how this works in the table below, where one investor who starts younger but invests less money over less time actually ends up earning more.

Early Starter Late Bloomer
Age Contribution Age Contribution
25 $2,000 25 None
26 $2,000 26 None
27 $2,000 27 None
28 $2,000 28 None
29 $2,000 29 None
30 $2,000 30 None
31 $2,000 31 None
32 $2,000 32 None
33 $2,000 33 None
34 $2,000 34 None
35 No more contribution 35 $2,000
36   36 $2,000
37   37 $2,000
38   38 $2,000
39   39 $2,000
40   40 $2,000
41   41 $2,000
42   42 $2,000
43   43 $2,000
44   44 $2,000
45   45 $2,000
46   46 $2,000
47   47 $2,000
48   48 $2,000
49   49 $2,000
50   50 $2,000
51   51 $2,000
52   52 $2,000
53   53 $2,000
54   54 $2,000
Total Contribution $20,000 Total Contribution $40,000
Total Earnings at 8% $135,042 Total Earnings at 8% $91,524

The Early Starter invested only $20,000 for 10 years and ended up making almost 50% more than the Late Starter who invested $40,000 over 20 years.

These figures are for illustrative purposes to demonstrate the power of time. Since investment values tend to fluctuate, it would be odd to earn the same rate or return each year for such a period of time. Also, your investments may not average and 8% annual return, depending on the investments you choose. The illustration also does not take into account fees or taxes. And, most importantly, it assumes each investor reinvests all dividends and earnings, and makes no withdrawals.

 
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