Below is a short Q&A that parents may find interesting.
What are the benefits of compound interest when money is saved and invested over long periods of time?
“The nature of compound interest is it behaves like a snowball of sticky snow. And the trick is to have a very long hill, which means either starting very young or living to be very old.” – Warren Buffett
“Money makes money. And the money that money makes, makes money” – Benjamin Franklin
As Benjamin Franklin described, when money is invested, the original money earns new money, and then the original money and the new money combined earns more money, and so on over time. In fact, Benjamin Franklin demonstrated the power of compounding over long periods of time when he bequeathed £1000 each to the cities of Boston and Philadelphia, in trust for 200 years.
The table below shows the benefits of compound interest over long periods of time for the Buy & Hold investment approach. If a parent started saving and investing €1 every month, from the day their children were born, and if their children then continued to save and invest €1 per month once they started working until age 65, the table below shows how much wealth they might have accumulated, depending on how lucky or unlucky they were and assuming annual investment costs of 1%.
| Investment Strategy | Very Unlucky | Unlucky | Average | Lucky | Very Lucky |
|---|---|---|---|---|---|
| Buy & Hold | €3,900 | €6,600 | €8,200 | €10,800 | €17,400 |
| Confidence Level % | 95% | 75% | 50% | 25% | 1% |
To estimate how much wealth might be accumulated for different amounts saved per month, just multiply the figures in the table by the amount saved. For example, if you and your child saved €10 per month over 65 years instead of €1 per month, and you were neither unlucky or lucky and earned average investment returns, your child’s accumulated wealth at age 65 using the Buy & Hold approach might be in the region of €8,200 x 10 = €82,000.
If you and your child saved €100 per month over 65 years and you earned average investment returns, your child’s accumulated wealth at age 65 using the Buy & Hold approach might be in the region of €8,200 x 100 = €820,000.
This highlights the power of compound interest, even for relatively small amounts of money, when you start saving and investing as early in life as possible.
Time and compound interest can be wonderful financial friends and we hope your children become life-long, childhood friends with both.
If I would like to save for my child’s education by investing in the stock market from the day they were born, how much might it be worth and how confident could I be that I would have more money than I saved after 18 years?
Our calculator estimates that there is approximately a 95% chance that you’ll have more than you saved and the table below shows the potential range of outcomes depending on how lucky or unlucky you are, assuming you invest €100 every month for 18 years (a total investment of €21,600) and incur annual costs of 1%.
| Investment Strategy | Annual Costs | Very Unlucky | Unlucky | Average | Lucky | Very Lucky |
|---|---|---|---|---|---|---|
| Buy & Hold | 1.0% | €16,400 | €29,100 | €38,600 | €49,500 | €88,900 |
| Buy & Hold | 0.5% | |||||
| Buy & Hold | 0.0% | |||||
| Confidence Level % | 95% | 75% | 50% | 25% | 1% |
Retirement Savings or Rent?
Due to the high cost of rent these days, many children continue to live with their parents even though they have started working themselves and sometimes parents charge their children a nominal amount of rent.
As explained here on our Retirement – Savings page, the decision not to contribute €200 a month to their retirement savings plan in their twenties could cost a young saver over €0.5 million by the time they reach age sixty five. Therefore, if parents have working children living at home with them, it might be an idea for them to consider offering their children the option of them paying rent or increasing their contributions to their workplace retirement savings plan.
Children should contribute at least enough to receive the maximum contribution that their employer is willing to make, but ideally they should try and contribute 15% of their income, which in Ireland is currently the maximum they can contribute in their twenties.
What is the biggest mistake parents make when teaching their kids about money?
“Sometimes parents wait until their kids are in their teens before they start talking about managing money, when they could be starting when their kids are in preschool.”
– Warren Buffett
What should parents impart to their children about money, savings and investment?
“Many parents strive to leave the next generation with some sort of an inheritance, but most of them give little to no thought of how insufficient this is in practice. Wealth that is unaccompanied by suitable traits is generally fleeting and results in wasted lives and general unhappiness. My own father left me no tangible inheritance except that which, in my own view, has been the most precious. From a young age, he taught me by example and by words the kind of lessons that have contributed the most to my own life. He taught me, for instance, the value of skepticism, the ethos of saving part of my income and the virtue of living on less than I earn. He was no economist, but he did know that one must produce before one can consume. He was no mathematician, but he was eager to explain the miracle of compounding. He never owned a credit card nor owed money to anyone. He explained how vulnerable one becomes by having debt. He showed me over many years both the value of history and the lessons we can learn from it, as well as the necessity of thinking for myself rather than relying on the observations or promises of others. He urged me not to avoid risk entirely but to be mindful of the kind of risks I should avoid. He taught me the value of modesty and honest friendship. It was an incredible inheritance, and it is precisely the same that I have sought to pass on to my own children.”
– Anthony Deden