The Road to Millions Starts at Age 16
An MSN Money article about how you can start on your first million at age 16 is a popular topic here in the blog-o-sphere. I myself remember reading it months ago, in a computer lab at school, and even going as far as creating an Excel document to double check and tweak the numbers. Low and behold, the math works.
The idea is, if you get a summer job at age 16 and wrack up $2,000 (I did this easily at my first summer job), but instead of spending the money on movies and shoes like I did, you put the money in a Roth IRA. You do this the next summer, the one after that, and the one after that, and then stop. After four summers, you’ve put in $8,000 and you just stop. Leave it there. When you come back to it at age 67, assuming an average 10.7% annual return, you’ll have just over $1,000,000 - and you never had to contribute to it past age 20.
Ok, it’s not the perfect plan. People say getting an average return of 10.7% isn’t as easy as this article makes it sound. Then again, some other people say it is. The article cites this rate as the “average compound annual rate on large-capitalization U.S. stocks.” So buy and hold some large-cap funds. Others point out that $1,000,000 won’t “really” be $1,000,000 in 40 years. Ok, ok, inflation, we get it. So the idea there would be, don’t stop contributing to the account at age 20!
I like this plan. You know what I like about it? It’s more than meets the eye.
Most high-schoolers are not going to be easily convinced to take all of their hard-earned burger-flipping money and well, not spend it. In fact, you’d have trouble getting most people to put aside $2,000 a year for something that’s 40 years away. But, the plan has some awesome benefits that you don’t have to wait 40 years for, and I think that’s the key to why it’s so awesome.
First and foremost, the plan gets to a person before they’re corrupted by debt. Debt is the reason most people don’t save. By age 18 or 19 a person can be staring down the barrel of student loans, credit card debt, and a car loan. 10 years later, and your credit card debt is worse, and you’re looking to take on a mortgage. Yikes. But with the “Start at 16″ plan, you start in before any of this debt can take a hold of you. Which is awesome.
Not only that, but the money can help someone in the difficult years when they strike out on their own immediately after college. Now, I don’t recommend raiding a Roth for any old thing. But if you want to take a job that’s a great spring-board job to launching your career, but the job doesn’t pay accordingly, knowing that money is set aside can severely aid you.
For one thing, you don’t have to feel bad if you can’t contribute as much to your retirement as you’d like to in your 20s. You have a nice nest egg already building, so you can pick up again when you get a job that pays more. Suze Orman recommends (in her YF&B book) using credit cards to bridge the gap in this sort of situation - where you’re trying to work on your career, but the pay simply isn’t enough to cover necessary expenses. This isn’t bad advice, so long as you very carefully monitor that key word of “necessary.” Similarly, you could take from your Roth to pay for necessary expenses - so long as “necessary” means “ramen and rent money,” not “steak dinners and decorating expenses.”
If I can convince just one 16-year-old to take this course of action, my life will be fulfilled. Well, no, not really - but I’ll feel awesome for a good, long time.
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I would love to turn the clock back ten years and implement this (but, of course, not stop contributing).
Hello, can you say early retirement?
It would be amazing to convince a sixteen-year-old just how cool this is.
I know there are ambitious younglings out there. It’s a matter of finding them and transforming them into mini millionaires! Muahaha
=^..^=
Comment by Jennifer Lynn — March 7, 2007 @ 12:14 pm
If I knew about this when I was 16.. though I didn’t start work until I was 17!
But still… money money money.. isn’t that what life is about? (well no but its a big part of it :P)
Comment by Tyler — March 7, 2007 @ 5:15 pm
Whats a Roth IRA?
Comment by x — March 7, 2007 @ 6:48 pm
I like most of this. I would only disagree with one thing. I don’t think that credit card debt is the main reason young people don’t save. I think its more about young people not seeing what’s ahead of them.
I would hope more parents would talk to their kids about the importance of savings, but too many parents have less of a clue than today’s average teen.
Last thing, 10.anything is pretty hard to find and sustain, but even saving less for lower returns is better than most people do for themselves!
Comment by Wil — March 7, 2007 @ 7:27 pm
X: In short, a Roth IRA is an investment vehicle for retirement funds. You are allowed (by tax law) to put up to $4,000 a year (currently) into a Roth, where it will grow tax-free. Once the money is in the account, you pick the investments that you buy with it. If you’re interested in more information, just say so, and I’ll do a whole post about it. Or, check out Suze Orman’s “The Money Book for the Young, Fabulous & Broke,” which does an excellent job of explaining Roths.
Wil: I completely agree that it is a lack of want, not debt, that keeps very young people (especially, in this instance, teenagers) from saving. My point was that a little later in life, like after college, this is still true - people don’t want to save, but even as they begin to, they are starting to accumulate debts, which act as a good excuse to continue not saving.
Comment by Stephanie — March 7, 2007 @ 8:07 pm
Thanks. After I read your article I googled the heck out of Roth IRAs and I am going to open one up soon. Thank you so much.
Comment by x — March 8, 2007 @ 7:07 pm
X: That’s just awesome! Make sure you either have the minimum to open (usually around $2000-$3000), or you find one that lets you open with no minimum. Roths with no minimum will require you commit to a monthly payment - usually $50 a month.
Comment by Stephanie — March 8, 2007 @ 7:30 pm
[...] Than You’s The Road to Millions Starts at Age 16 - (Even though I knew the importance of compounding well before 16 I never followed through and [...]
Pingback by My Financial Journey » Carnival of Personal Finance No. 91 — March 20, 2007 @ 6:32 pm
Definitely an interesting idea, but young investors need to understand that by saving money for an even longer period time, they could potentially have multiple millions.
-Sam from MarketMatador.com
Comment by Sam Lustgarten — April 21, 2007 @ 5:57 pm
I dunno how I missed this marvelous post of yours. Anyway I just wanted to say that the road to millions start at any age ^_^ — well cept maybe 50 — unless you win the lotto.
Comment by Juan Millon — April 25, 2007 @ 2:19 pm
Good luck with this.
I have found that what was true for earlier generations does not necessarily continue to be true, and what you put in a spread sheet can run into serious problems based on the assumptions.
Comment by Deborah — June 3, 2007 @ 10:46 pm
GGGRRRRR. the sad part about this is that I had money at that age I never spent, just sitting in a bank account! I used it years late to buy a used car and then to pay for my wedding. If only someone had told me. You’d think they would teach you this in school. So frustrating.
Now, it’s 15 years later, and not at a point where i can just hold on to money thanks to debt! truly sucks.
Comment by rosie — June 18, 2007 @ 5:30 pm
Sad i will have to get some money
i water the plants front and back i unload and reload the dish washer and i clean my bathroom and clean my bed room I make up my bed and i dog sit
Comment by Rachel Danae Patterson — June 19, 2007 @ 4:27 pm
By the way, I believe that taking from your Roth IRA to make a down payment on a home isn’t penalized. So this makes even more sense for someone who’s young! You can transfer your wad of savings from an IRA to home equity.
Comment by Ryan — October 16, 2007 @ 9:22 pm
Would you email me your Excel chart in order to compound? Currently have 10,000 and 24 years old, would like to know how much will I have when I have 65
Comment by Juan Carlos — January 21, 2008 @ 4:16 pm
It can only happen in an ideal situation. But there are many other ways to achieve millionaire freedom.
Comment by Timothy Lim — April 23, 2008 @ 10:28 am