Compound Interest – Enhancing Your Child’s Savings
Following up on my latest article on compound interest, this continuation will not only show why compounding is an ideal strategy to enhance your child’s future, but also take a closer look through graphics at how compound interest works in practice.
Let’s say you managed to save a lump sum of €10,000. The table below shows not only the influence of time but also the different rates of return on this investment. This makes one thing clear: over time, just saving money is not the key to a large fortune. Compound interest is the main key.
Saving early is of essence, just compare the difference between the amount compounded after 10 years and 20 years…. This makes your children ideally poised for maximum benefits. That is why as the saying goes, start them young…
Compound Interest – Your child’s best friend
Saving for your children early is a great way to build a nest egg which can be compounded exponentially if invested wisely.
Nowadays there are several brokers and investment services firms that offer many options when it comes to saving for your children. Remember, this is not just about building wealth, it’s also about setting an example for your child. The earlier children learn about saving, and the benefits associated with compound interest, the more chance they get to build wealth over time, which would allow them to live a more comfortable life.
What if you are a teenager?
‘I am 17 years old, I can think about saving later.’
That’s what many teenagers think. Yet, saving early can reap incredible benefits. If you have €10,000 and started investing it at 17 years, by age 57 you would have approximately €217,245 (based on an average rate of return of 8% a year). If you invested €10,000 at age 27, thirty years later you would have €100,627. That’s a whopping €116,618 difference.
The teenage years are a great time to begin investing in your financial future. Compound interest is one of the most powerful and proven strategies for building wealth. Nowadays investing has become so easy that you can even open an account and start a monthly savings plan. Just saving €100 per month for 30 years can turn to €135,939 (with an average rate of return of 8% annually)
Maybe you want to spend the money you save monthly on a home deposit after 10 years.
If you just save €100 per month for 10 years, you would have €12,000 in cash. How about investing this amount in a fund with a conservative rate of return of 3% a year? After 10 years you would have €13,756. That’s almost €2,000 more with very little risk.
So what are you waiting for? Put those teenaged pennies towards something meaningful now and compound interest will pay off big later down the line.
A higher rate of return normally comes with more risk
If you’re ready to take your finances up a notch, investing in the stock market could be the way. With just €100 per month for 40 years and an annual 10% rate of return, you’ll have over half a million dollars when it’s all said and done. Plus – with help from someone 18 or older – you can get investing sooner than ever before.
Just remember though, higher rates of return bring with them a higher risk. No matter how successful it may feel, especially during years when the stock market is doing great, you’ll always want to avoid the possibility of losing more than the money you invest.
To lower your risk, we recommend that you diversify your investments. You have a choice of investment vehicles nowadays. From mutual funds offered by scores of brokers and investment firms, to ETFs (exchange-traded funds), individual stocks, bonds, and even the crypto market (for those with a higher taste for risk).
Want to take this further?
At the Money Coaching Hub, our Certified Money Coach, Luca, can help you find ways to increase your savings, make them more regular, and enhance your chances of gains in the long-run. Your personal financial plan deserves this. You deserve this.
Contact Luca directly on firstname.lastname@example.org