Kids and Investing

What's the rush? Why do we urge even teenagers to invest? Why not just let young people wait until they're a bit older and, say, in college, or just out of college?

Well, if you want to make sure you end up in a first-class nursing home with round-the-clock care, you should think about getting your kids involved in investing -- now. Kids have one colossal edge over the rest of us when it comes to investing: They have time.

Consider that if you're 35 years old, you might stay invested in stocks for only 30 to 40 years. But if you're 15, you've got 50 to 60 years.

Here's an example: Let's say that Tiffany saves part of her allowance and then flips burgers or babysits to earn even more. She manages to save about $10 per week and invests $500 each year for 11 years, from ages 14 to 24. She socks the money away in the stock market and forgets about it until age 65. (We'll assume that the investments in this example grow at 11% per year.)

Now, her friend Trevor, who's the same age, puts off investing until much later. Beginning at age 40, he invests $5,000 each year for 25 years. Believe it or not, Trevor won't be able to catch up with Tiffany. It's mathematically true. In her 11 years, she saved and invested a total of $5,500, and poor Trevor saved and invested a whopping $125,000. But by the time they turn 65, Tiffany's money will have grown to $705,688, beating Trevor's $634,994.

How can she possibly have come out ahead? It's because of time. Tiffany's money grew for 50 years, roughly twice as long as Trevor's did. And she was ahead of him every single year. (Here's a tip -- Tiffany or Trevor or some teen you know might be able to boost his or her investing with $1,000 from us -- learn about our $1,000 teen contest.)

Mathematically speaking, when you leave money to compound year after year, the really big changes happen in the later years. A nest egg may grow by just hundreds of dollars per year in the earlier years, but in later years, it may be growing by hundreds of thousands of dollars per year.

This eye-popping example demonstrates that it's never too early to start investing. How much money you start with isn't as important as how many years you have in which to invest that money -- each year can make a big difference at the back end.

To get your youngsters started thinking about investing, click over to our Teens & Their Money area.