Kids and money: Why saving young matters

April 1, 2011

Ionnie McNeill REUTERS/HandoutIf retirement saving is a 100-yard dash, take a look down the track. Ionnie McNeill already has you beat.

Though she’s just 22 and a senior at Howard University, McNeill has been investing in stocks for more than a decade. She purchased her first shares (Citrix Systems) at age nine, and opened her own Roth IRA at 15. Now, at an age when most college kids are perfecting their beer pong and playing clumsy guitar in their dorm rooms, McNeill has assembled a powerful $50,000 portfolio.

Feel inadequate yet?

“I liked the idea of walking into a McDonald’s and being a part-owner,” says McNeill, who first got the bug by tagging along with her mom to investing workshops. “Of getting annual reports from the company that was making my breakfast cereal. Of buying Nike stock instead of Nike shoes.”

Indeed, in her youthful enthusiasm for P/E ratios and earnings-per-share, McNeill stumbled onto probably the most critical investing principle: The value of time. Take this bracing example from mutual-fund giant Vanguard: Dawn starts saving at age 25 and contributes $2,000 a year until she’s 35, then never adds another dime. Dave waits until age 35 and then chips in $2,000 a year all the way to age 65.

By age 65, Dawn has almost $315,000, if we plug in eight percent annual returns. Dave finishes at a shade under $245,000, even though he contributed far more. In fact he invests three times as much, but still loses to Dawn by 22 percent. That’s the sheer power of time.

Now back-date those numbers all the way to age nine, like Ionnie McNeill, and you get why she calls starting so early a “guaranteed ticket” to wealth. “When I was growing up in Miami, older people in my neighborhood would always say ‘If only I started when I was your age’,” she remembers. “Time after time. That really stuck in my head.”

After all, as much as we like to parse which mutual funds are beating their benchmarks, the real portfolio difference-maker is how much money you’re putting to work, and how soon you start. It’s not much more complicated than that.

“The power of compounding is the most powerful force in universe,” says Allan Roth, a financial adviser in Colorado Springs and author of How a Second Grader Beats Wall Street. “If kids start saving early, it creates habits that will last a lifetime. Even if the initial dollar amount is not very much.”

Roth started his boy Kevin’s investment career thanks to a cash gift from his own parents, back when Kevin was only six. Roth thought it would be fun to see if a simple, no-fuss portfolio for his child could beat most investment pros on Wall Street. He chose a mix of three indexes: 60 percent in U.S. stocks, 30 percent in international stocks, and 10 percent in a total-bond fund. And the answer, by the way, is yes. Kevin — now in seventh grade — is trouncing most of the highly-paid managers out there.

Here’s the real head-scratcher, though: How do you interest your child in investing in the first place? At an age when Power Rangers or the Twilight books have taken over their collective consciousness, and little boys are starting to chase little girls, getting them to focus on price-to-book or free cash flow can be a mission impossible. And come to think of it, having a Mini-Me version of Jim Cramer at the dinner table might not be that enjoyable.

But even if their interest in the Dow or the Nikkei is less than zero, you can still save on their behalf. You can gift up to $13,000 a year with no tax implications whatsoever. As a result, a starter brokerage account for Junior is a much wiser long-term investment than an impressive collection of ZhuZhu Pets. Then once your kids start earning income during their teen years, and they’re allowed to open their own Roth IRAs, they’ll be off to the races.

Sure, they might not appreciate the thought you’ve put into their pint-sized portfolios. But once they see those numbers growing in their accounts, they might change their tunes. And when all’s said and done, a huge head start on their retirement saving could be the best gift you could ever bestow.


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The flip side of this is that early debt is a killer.

Ionnie has a $50k investment portfolio that will generate returns year after year for the next 60+ years of her life. Many young adults her age have $50k student loans (or worse, $10k of credit card debt) that will leech their income after they graduate.

Hard to dig your way out of that hole.

Posted by TFF | Report as abusive

The answer to the question on the home page is “yes”. Everyone’s kid is equally smart and clueless as Jim Cramer.

Posted by nicfulton | Report as abusive

I wonder if she also realizes that all her electronic assets could suddenly be gone if faith in the fiat currency that backs it all collapses. Someday the music may stop, and there would be many unhappy losers. Then again maybe the wizards will be able to keep the music playing and Lonnie will be a winner. Capitalism is all about winners and losers, and being lucky enough to be given knowledge and opportunity can go a long ways. As for playing the game in its current form, she is off to a great start.

Posted by oligarchy | Report as abusive

GREAT article and it’s EXACTLY what this country needs more of: more mindlessly dollar-chasing right-wing lowlifes! WELL DONE, REUTERS!!

Posted by kjjjjjgfs | Report as abusive

@ nicfulton
Well said!
Jim Cramer is as much of a role model as Cosmo Cramer.
The man is a hack, a clown and a baboon.

Posted by PwlM | Report as abusive

Would be nice to actually come along some information HOW to start the ball rolling from the very beginning, otherwise such articles is just useless reading :(

Posted by sausis18 | Report as abusive