One thing — the essential thing — that (some) children* don’t understand is the way that savings grow over time.
The only sure way to wealth is
- Living below you means and
- Saving consistently for a long time, and
- Putting those savings to work so they produce earnings, and
- Investing those earnings so that they produce compounded earnings.
One of my children just can’t grasp the idea. For this child, “savings” are for buying a new cellphone. This child has already broken or lost 2 cellphones in the past 2 years. Each cost about $200, money earned by working part-time. (In comparison, 2 years ago I had a cellphone that was a couple of years old. I think it cost me $29 when I bought it as it was a discontinued model. About a year ago, when my old cellphone stopped working, I bought my first smartphone for $49.) I tell him, if you remove money from your savings account, then it’s not longer savings.
I advise, I implore, I beg this child to save. This response is, “it’s not going to make any difference 50 years from now whether I spend or save this $200”.
In a way, that’s correct. This particular $200 is a very small amount of money compared to the sum I hope this child is able to save before he retires a half-century from now. The important thing is the way that thoughts become words, words become deeds, and deeds become habits. If it’s easy to spend savings for a cellphone, it will be easy to spend them on something else. If that continues, instead of having a saving habit there will be a spending habit.
I think a large part of the problem is the amount of time that is required for a savings account to grow to an impressive size. When you’re just starting, when your savings are measured in the tens, hundreds, or even a few thousands of dollars, you don’t see much progress. The earnings generated by your savings are small. Nothing seems to be happening. It’s like watching a tree grow.
My retirement account didn’t reach the $100,000 mark until about 10 years after I started my first post-college job and signed up to have part of my paycheck put into the 401-K plan offered by my employer. It only took 5 more years to get to the $200,000 mark. The additional $100,000’s came faster. Of course, as I advanced in my career and earned more money, I was able to make larger and larger deposits. But the real magic is the compounding earnings. One significant milestone was when the amount earned by the money that was already in the account was larger than the amount I was contributing. Another was when, in one year, my account grew by more than my total annual salary.
It takes time, years, to get to the “wow!” moment, the moment when you think to yourself, “I never thought I’d have this much money in savings“. Getting there takes a lot of persistence and self-discipline. I hope my encouragement and my example will help my child on his financial journey.
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* by “children”, I mean both those that are under 18 years old as well as those that are much older.
