Generation Z's Advantage
As my two sons have gotten older our dinnertime conversations have gotten longer and more interesting. I’m really enjoying the back and forth between us. They’re interesting to listen to and they’re curious about a lot of things.
At a dinner last week, we had a great conversation about a range of topics from the differences in our generations to their personal finances. They had lots of questions about what it was like for me at their age, and it was fun for us to talk about how things have changed in various ways. I spared them the stories of how I walked to school uphill both ways.
When we turned to saving for the future, I mentioned to them that their generation (Generation Z) has a critical advantage my generation can never have: more time to invest. Time invested is a key component to building wealth. Let me explain.
There are three truths to building wealth that apply to everyone:
You must live beneath your means so there is a surplus of funds every month.
You need to take that surplus and make regular investments.
You need to be patient and let the investments work. That is, you need to have time. And the more time you are invested, the better your chances of success.
For young people just leaving school (whether high school, trade school, college, etc.) it is critical that they get started with an investment plan immediately while time is their friend.
Let’s use a hypothetical example. Suppose two different people, one age 20 and one age 30, each invest a lump sum of $10,000. Also, let’s assume each earns the exact same return, 7.2% annually, until they’re each 60 years old. At 7.2%, one’s investments will double every 10 years.[1]
Here are their hypothetical results:
In this hypothetical example, the 20-year old’s investment results at age 60 are double that of the 30-year old simply because they got started earlier. The investing that one does in their 20s can have a critical impact on their future financial success.
If you have adult-aged children, talk to them about getting started right away.
[1] This is called the Rule of 72: Divide the number 72 by an investment return, and the result is the number of years it takes to double your money. The rule of 72 is a mathematical concept and does not guarantee investment results nor functions as a predictor of how an investment will perform. It is an approximation of the impact of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double in value.