I believe THE single biggest failure of the American education system is the fact that financial literacy and the power of the stock market is not correctly depicted in school. Wall Street is viewed as some demon and a highly complicated place, which of course it is, but not every single person needs to be on Wall Street. For many, having a safe retirement and achieving financial freedom before 65 is the priority. I believe that the first thing kids should learn about stocks is this picture right here:
Obviously this isn't some special graph with highly complicated technical analysis, it's not a complex financial model or trading algorithm that only a computer science major would understand. This is a simple compound interest graph. The most important thing that kids first need to understand is how powerful compound interest is, and how important it is to start early and be consistent. All that is needed to achieve this lump sum of 3 million dollars is to constantly contribute 305 dollars a month for 40 years and start an initial investment with 2500 dollars.
Many readers are going to wonder how a kid is going to come up with 2500 bucks?! My simple answer is: ask their parents for it. You heard me, most families got three rounds of stimulus this year totalling around $5700. Fortuitously, $2500 was paid per child per family. (thank you government!) This money was meant for the children, and I believe that giving it to them to invest will not only yield them 3 million dollars someday 40 years down the road, but it will teach them invaluable lessons of financial freedom, consistency, persistence, and a whole slew of life lessons that come from the stock market. I'm not asking everyone to be a stock market wiz. You don't have to be to make it big in the stock market. The second thing that everyone should know is what the S&P 500 is and what is an ETF. The S&P 500 is a collection of the United States top 500 companies and an ETF is a fund that tracks a certain entity. Anyone can buy an ETF that tracks the movement of the S&P 500, which is one of the safest ways to grow your money meaningfully. Basically you are buying a small chunk of the top 500 companies in the world. Companies like Apple, Microsoft, Google - these companies are market leaders that will not be going away anytime soon.
This leads me to the third and final thing kids must know before entering the stock market. Risk is important to all investors, but for kids who need to be shown a positive impression of the stock market, the best way to embody this is to show them the historical return of the S&P. We already know that the S&P cannot go to zero like any other company because it is composed of 500 of them. By investing in the S&P you are diversified into the most successful companies in the world. Investing in the S&P is one of the least risky things you can do in the market. Additionally, we know that the S&P 500 has averaged returns over 14% per annum for the past decade. We know that since 1978, there have been 43 years of market activity, only nine of them have shown a loss on the year. Expressing this a different way, the S&P has ended lower than when it started on the year only nine times over the last 43 years. This includes the financial crisis, dot com bubble, and of course a pandemic. Through all of that, the S&P is still up 4,458%. If you put $1000 dollars away in the S&P back in 1978 and totally forgot about it, didn't touch it, didn't think about it, you could cash out now with over $43,000! Adjusted for inflation, that is a profit of $39,000! That kind of money will get you a 2018 base model Maserati Ghibli with less than 20,000 miles. A Maserati! For free! Or you could buy a Tesla Model Three, but you get the point. A thousand dollars goes a long way if you are willing to wait and won't need it for 40-something years. Surprisingly, those kinds of gains are considered conservative. Investing in the S&P is considered the easiest and safest way to make money in the stock market, and it still can make you tons of money. It is not uncommon to have crazy gains if you invest early and constantly.
We discussed the safety and consistency of returns and how kids can get the initial 2500. Now, we must now discuss how a kid is going to be able to contribute $305 monthly (and consistently) when they can't work yet. Obviously this is going to be the hardest to accomplish when they cannot obtain a job, (305 dollars a month as an adult with a salary is not hard to come up with) Nevertheless, there is an easy way to come up with this money. $305 a month is $3,660 a year, or a little over $10 dollars a day. Simply skipping that overpriced Starbucks drink, cancelling a few of your subscription services, one of your two streaming sites, or simply having your kid open a lemonade stand on the weekends can get you to your goal. There are so many different ways to come up with $3660 a year - with consistent effort, cutting down on the excess, kids will learn the importance of hard work and what it takes to realize a significant goal. $3 million dollars will not make you insanely rich, but it will offer the safety and stability needed to retire. $3 million dollars can go a long way even if it is 40 years off, but it isn't always about the monetary value of your hard work. The value is the lessons taught along the way that can only be obtained by experience and time. This is invaluable. Seeing money grow exponentially as you go about your daily life will teach kids important lessons. Saving more and spending less will teach kids perseverance. Watching their money grow exponentially will teach kids to have their money work for them, not just work for money. (and maybe who knows, this may ignite a spark in them to pursue this kind of career even more)
The Bottom Line - I suggest all kids go ask their parents for their stimulus money, find a way to save 10 dollars a day, set up dividend reinvestment, and consistently buy an ETF that tracks the S&P 500 every month. In 40 years when you want to retire, you'll have over $3,000,000 waiting for you.
*data from:
**I did not include dividend reinvestment in the the 3 million dollar level so your returns will be much higher, however I also did not account for taxes (since everyone pays different rates, and they are likely to change 40 years into the future) but with over a 1% dividend yield, reinvested every year should cover that, likely still leaving you with over $3 million. All calculations are assuming an per annum return of 12%. I suggest playing with the compound interest calculator on investor.gov - you can play around with the different numbers to create a more personalized result for your own situation.**
***For parents or future parents reading this please consider opening an education account the moment your child is born and investing it into the S&P consistently in an UTMA or UGMA account. Have your child pick stocks that they like when they are young. Make it fun, make it a competition, make it interactive, don't just do it for them. By high school, I guarantee they will know more about life and money than 95% of their peers.***
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