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.
Jennifer Lynn says
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
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)
Whats a Roth IRA?
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!
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.
Do you have any recommendations on which firms to open a Roth IRA with that don’t charge fees, etc?
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.
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.
Juan Millon says
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.
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.
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.
Rachel Danae Patterson says
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
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.
Juan Carlos says
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
Timothy Lim says
It can only happen in an ideal situation. But there are many other ways to achieve millionaire freedom.
Most of these plans are great but life happens to most people and they need money. I think you may need to hide it from yourself or have someone hide it for you.
Hi. The number one goal to becoming wealthy is paying yourself first. Having money coming out your check before you get it is the best way to save. I’ve been using this method for 3 years now. I wish I would have started this when I was 16.
Newspaper articles says
Heh, I actually did this (I just finished my junior year of college). It was a bummer that I couldn’t go out with my friends as much as I wanted but I think it’s all going to be worth it when I retire. Plus I get to be inwardly smug. 🙂 I just hope I don’t die young.
My father both employed me in his small company and showed me what would happen with a Roth IRA when I started high school. I was hooked. I’ve always been cheap and greedy and never made megabucks at any job, but I’m glad to say that I was able to put away a good chuck of change in high school and now have $20k in my Roth. Even at only 8% compounded, I will have more when I am my parents age than they have now if I never save another dime. As a saver, I’m excited.
Wish my parents and I had the funds to continue in college and grad school but life isn’t quite 100% fair and expensive private schools are expensive. Looking forward to starting to add more to it in the coming years.
You may not be able to make a lot in the teens but knowing your money and the way it works will go a long way.
Can anyone give realistic financial tips to people who were born in and still live in poverty? Saving a few dollars here and there in a frivolous retirement plan is not realistic if you’re feeding and caring for minor children and ailing parents and/or grandparents at the same time, if you’re working two jobs to keep from living on the street or engaging in less-than-legal career options, or if an emergency or chronic illness forces you to squeeze your last penny on your survival. Will those of us who live in the real world ever be given a method to save money when most of us are forced to use 75% to 90% of what income we get on rent and whatever remains to be used on food, lights, gas or heating oil, water, sewer or garbage, phone, and medical care? Welfare, SSI, SSD, food stamps, Medicaid, TANF, and WIC only go so far, along with a minimum wage of only $6.85 an hour. Let’s present some realistic tips on how to pull people out of poverty first before even thinking about showing rich kids how to save their summer job money and invest it, OK?
I appreciate your concerns. I grew up in a rural area, where poverty was very common. I’m afraid, however, that each of us is best suited to write what they know. I highly doubt that a personal reading this blog will be able to use absolutely everything written here – instead of trying to write each article for everyone, I target individual articles to different groups. This particular article happens to be written for teenagers and college students who work jobs that provide discretionary income.
I hope to write something for the group you mention – however, as I’m sure you’re aware, there are no easy answers. If there were, it wouldn’t be an actual problem.
No matter what, though, I believe the basic principle of personal finance apply to everyone. You can only get ahead if you can find a way to live on less than you earn, and put away the rest into some sort of savings. My goal, with this site, is to reword, rework, and reiterate that for different situations, because it nearly always applies.
I hope I can someday get to the point where I can help the truly impoverished to help themselves. I’m working my way there, I suppose, but starting with what I know.
Great Post, will share with teenage son!
Damon Day says
Excellent post Stephanie,
For those that are wondering, if you continued to contribute to the IRA in this example 2000 per year at(167 per month)your total would be up over 4 million at the age of 67.
If you feel that 10.7% is not likely, well, if you start at say 20 years old, and put 2000 a year into a roth or traditional ira and earn a modest 8% interest it would be worth over 1.3 million by age 67. Remember you are only investing a total of $94,000 of your own money and you will have 1.3 million at retirement.
Now what if you are 40 and think you missed the boat? Take advantage of an employer sponsored 401K. Lets say you contribute 700 per month, and you get a 300 dollar match from the company. If you gasp at $700, remember that is pretax money. So it is probably close to $490 after tax dollars.
At a 10% interest rate your 401K will have over 1.6 million dollars in it by the time you are 67. The point is that it is never too late to start. Save more, spend less, get out of Debt.
I’m 16 and have some money. Unfortunately I can’t find a job (live in a small town with normally limited prospects, even more limited due to the economy). As soon as I get a job though, I plan on opening a brokerage account, and eventually retiring early like the first comment said.
Oh how I wish I could go back in time and save more money at such a young age. I can’t even say that I didn’t understand compounding interest, I did. I just was not mature enough to implement it.