Your Life

Teens and money: Help your teen unlock the power of compounding

- April 25, 2022 4 MIN READ
Teens and money - compound interest

Teens and money aren’t generally good mates, but they are actually uniquely positioned to take advantage of the power of compounding. Lucky ducks!

On his 18th birthday, my son Ben asked me how he could be a millionaire by age 50.

What a powerful question – one I wish I had asked at his age. The reason this is so powerful is that at the time of asking, Ben had 32 years ahead of him for the magic of compounding to do its work

Now compounding is a wonderful concept, but hard for most people to achieve. For many people, they have good intentions about sticking with saving and investing and then life and other demands get in the way.

However, I believe if your teen can get started young, they have a good chance of getting compounding to work for them. Here are three ways to you can nurture teens and money habits that will help them for life.

1. Get them excited about a long-term investing goal

Let’s face it, at age 18, looking out 32 years is a very long time – and the goal of one million in the kitty by age 50 could feel insurmountable at the start.

Which is why helping your teen to set a clear long-term goal that is important to them can help to motivate and inspire them to stay on track year after year.

My son had set his goal: one million dollars in investments by age 50, so that part for me was easy. What was important is that this was his goal, not my goal for him.

What I noticed, however, was that he was really nervous about his big goal – he seemed more scared than excited. He had no idea if this was ‘pie in the sky’ or something within his reach to achieve.

So, we worked together to break it down – what did this look like on a daily or weekly basis.

Crunch the numbers

To crunch the numbers, we used the Money Smart Compound Interest Calculator. We calculated that with his $5,000 of initial savings, an annual return of 6 per cent, and putting aside $28 a day, he could accumulate $1,019,900 by age 50. [Note that the calculator does not include a discount for inflation, so this amount is in future dollars.]

Ben was chuffed. He realised his goal was possible. But do you know the thing that amazed him most? His contribution to achieve his magic million dollars was just $332,040 – around one-third of his final goal. The rest ($687,860) would come from making money on his money. The money he earned on his money contributed twice what he put in.

This is the magic of compounding – and why it’s sometimes called the eighth wonder of the world.

2. Create a cash flow plan

The next step was to drill down and help Ben figure out how he could save $28 a day. That meant preparing a cash flow plan.

First, we identified his income for the next year. This included his earnings from tutoring and other employment (which usually ramped up during uni holidays), his allowance for doing jobs at home, and gifts received on his birthday and special occasions.

Second, we allocated his savings as a mandatory expense.

Third, we worked out the rest of his expenses.

You’ll notice that we hard-coded savings first. This is because Ben wanted this to be his number one goal – and wanted to avoid impulse purchases or silly spending to get in the way.

The good news was that with a little tweaking, he could earn enough income to achieve his savings and still have money for essential expenses and to put aside for other things he wanted .

3. Create a system for making progress

The final step is to create a system to turn this goal into a reality. According to James Clear, author of the bestseller Atomic Habits, goals are useful for setting the direction, but you need a system to make a goal a reality. This is particularly important when it comes to teens and money.

In Ben’s case, he needed a system to help him save $28 a day – which we framed as $196 a week, every week, for 32 years.

Here are some of the ideas we discussed:
  • Use a daily habit tracker app (like Strides or Habitica) or even an old-fashioned calendar to mark off each day that he achieves his daily savings goal.
  • Use a dollar savings tracker (like this one or one of these) to chart his progress towards his dollar goal over time
  • Round up his daily savings amount from $28 to $30 (from $196 to $210 a week) to push himself a tiny bit further. This will also create a buffer along the way. In fact, just this small change of $2 a day may enable him to notch $1 million one year sooner.
  • Keep a buffer in his savings so that even if his earnings drop (such as during exam periods), he has enough cash in his account to still meet his savings goal.
  • Keep a money jar on his desk, where he can put spare change. This is an easy way to grow his savings and serves as a constant visual reminder of what he’s aiming to achieve.
  • Save into his cash account but transfer his savings into his investment account. In this way, his money could earn a healthier rate of return.
  • Make the process of investing effortless, he will set up an automatic payment from his bank account each week into his investment account. This way, he will be saving first and can spend what is left in his bank account in any way he wishes.

Teens and money aren’t usually a great combination, but imagine if your teen could be a 50-year-old millionaire? Use the three simple steps above to help them harness the power of compounding. You could be giving them a great chance of making their first million.