It’s yours for the taking …

I just had a phone conversation with a distant relative. A young man at the age of 16 that sounds much older than his age. He is going to school (high school) and working at McDonalds. He wants to start saving money. He indicated that he would like to save as much as possible. This is a post he put on Facebook moments after messaging me indicating he would like to have a conversation at his Grandmother’s urging (Thank you Sherry Duncan):

$360 – 11% = $320.4 that’s forty hours at 9 an hour. It’s safe to say I’ll be putting half of that away. That’s $1,281.6 a month and I’ll be saving $600 of that, that gives me $681.60 to spend a month although it doesn’t seem much, but teenagers can do a lot with $7,200 a year that’s saving under half your paycheck you have a phone bill maybe and maybe you help with a small bill at home like Wi-Fi or water. I used to be a big spender as soon as I got any money it’d be gone. But I always complained after for not having enough to get what I actually wanted… So I want to do a challenge any of my friends with a part time job. Calculate your wages and put a percentage of that away because if you don’t you’ll be stuck when you get older. You’ll be broke all the time you won’t be able to get anything you actually need or want.

Keep in mind … this kid is only 16. I hope he continues to think this way.

During our conversation he mentioned he may go to college or he may go into the Marines after High School. I told him either would be good. The Marine’s would allow him to go to college on their dime – and if he went to college and got involved in ROTC first he could graduate college and go into the military as an officer rather than an enlisted person (of course once he had finished his basic training – or “Boot Camp” as it is referred to in the Marines).

His main goal, he said, was to accumulate enough money so that he does not have to “want” for anything during his lifetime. He wanted to start early before he “settles down to have a family.” Growing up seeing his parents struggle with making ends meet he said he did not want the same for himself.

He reminded me of my brother and I who – on the way to high school walking in a foot of snow one cold morning in Chicago – made a commitment to each other that we would not put our families through what we went through as kids. I can still remember Spam and Cornbread on Thanksgiving. He said he did not have it this bad because maw maw Sherry always did a nice meal.

I suggested that this young man first put away 3 to 6 months of expenses for an emergency/rainy day fund before committing any money to investments that could make him or lose him money. In his case at $681.60 that would be about $2,045 to $4,090. This would be money to last long enough for him to find another “Job” should he get laid off at McDonalds or wherever he may be working at the time. He could manage the lower end of this in about 3-1/2 months at the rate of $600 per month.

Now let’s assume that he does this and then continues to “Invest” $600 per month for the foreseeable future (say 10 years). In 10 years he would be about 26 … out of college or possibly in the Military and potentially well on his way to making his own family.

If he is able to save and invest $600 per month for ten years in a good growth mutual fund – or some stock market investment – and if that fund or investment only makes him an annualized return of 10% per year … in ten years (at age 26) he could accumulate a grand total of $122,906.99. This assumes 10% per year compounding monthly (so 0.833% per month).

I did mention to him that I really thought he could do better than 10% per year if he would eventually consider real estate or stock options that would provide passive income into his investment account. However, let’s assume he stays conservative and does not get into the other “wild” investments.

If at age 26 he starts raising a family, buys a home … cars … TVs … Educating Children … repair of the home, etc. and does not invest another dime – but does not take anything out of his nest egg because he can make ends meet with his salary.

What could happen?

If this money just sits there for the next 40 years – until his age 66 – earning the same old 10% per year (compounded monthly); he will accumulate a grand total of $6,600,186.87. This amount of money, my dear friends, at a simple 5% payout per year would provide a nice retirement income of $27,500 per month.

All this for saving almost 50% of his earnings now and for the next 10 years and then just letting his accumulated capital “work for him.”

Keep in mind this also assumes that for the next ten years he only earns an average of $1,281.60 per month take home and saves almost 50% of that. As his income increases over the next ten years if he can still save almost 50% he would accumulate even more the first few years.

Here’s the one warning or caveat I’d give him: When he does decide to settle down and get married, make sure he picks a lady who also believes in “DELAYED GRATIFICATION” or she will spend down his capital in a hurry. Also, when and if he decides to purchase large ticket items (such as a car) or something that will depreciate in value over the years of ownership … use his own money. Just make sure to pay it back in.

So, if it would cost $500 per month to finance the car over 5 to 6 years … use his cash and put back the $500 per month for the next one for 5 to 6 years. He virtually would become his “own banker” this way.

If on the other hand he is buying something that has the potential to appreciate in value I would suggest he use the other man’s money (the bank) and finance it. This is called “Leverage” and it is what keeps the rich getting richer and the poor getting poorer.

A word to the wise:

I am far from being a bible scholar and not sure if I should even be quoting it since I am likely taking it out of context.

My favorite Bible Verses:

Mathew 7:7-8 —

7 Ask, and it shall be given you; seek, and ye shall find; knock, and it shall be opened unto you: 8 For every one that asketh receiveth; and he that seeketh findeth; and to him that knocketh it shall be opened.

Ask when you don’t understand, Seek the information you need, Knock on the door of those who have done it before you. Nothing in a free capitalistic society is impossible when it comes to being Financially Successful.