Research
Compound interest is often called the "eighth wonder of the world," and for good reason. It has the potential to transform even small amounts of money into significant wealth over time. Starting early gives teens a unique advantage, allowing them to build wealth with less effort and fewer risks. Let’s explore how compounding works, its impressive stats, and why every teen should take it seriously.
How Compound Interest Works
In simple terms, compound interest means earning interest not just on your initial deposit but also on the interest that accumulates over time. The longer your money stays invested, the more it grows.
The Math Behind Compounding
A single $100 investment at an 8% annual return grows to $10,937 over 50 years.
Contributing $50 a month starting at age 15 will result in a balance of approximately $352,000 by age 65, assuming an 8% annual return. That’s just $30,000 in contributions turning into six figures.
A Tale of Two Teens: Alex and Jordan
Alex starts at 15 years old, investing $100 every month in an account that earns an average annual return of 8%. By the time Alex is 35, their investment will have grown to about $58,902, even though they only contributed $24,000. If Alex keeps that investment untouched until age 65, it will grow to nearly $507,000.
Jordan starts at 25 years old, investing the same $100 every month. By age 35, Jordan’s account will only have $18,509. If left untouched until age 65, Jordan’s investment will grow to about $245,000—less than half of Alex’s total.
The difference? Alex started earlier, allowing the power of compounding to work longer.
Why Starting Early Matters
More Time Equals Less Stress
Starting early allows you to contribute smaller amounts while still reaching your financial goals. This makes saving or investing manageable, even with a part-time job or allowance.
Consider this: To reach $1 million by retirement at age 65:
If you start at age 20, you need to save about $319 per month (8% annual return).
If you start at age 30, that figure jumps to $731 per month.
If you wait until age 40, it skyrockets to $1,698 per month.
Takes Advantage of "Free Money"
When your money earns interest on previous interest, you’re essentially making your money work for you. It’s like giving yourself a raise without any extra effort.
Albert Einstein reportedly called compound interest the “greatest mathematical discovery of all time” because of its exponential growth potential.
Builds Healthy Financial Habits
The earlier you start saving or investing, the sooner you develop habits that will benefit you for life. Teens who understand compound interest tend to be more financially responsible adults.
According to the National Endowment for Financial Education, teens who receive personal finance education are 20% more likely to save regularly as adults.
Conclusion
Compound interest is a superpower that every teen can harness. By starting early, contributing regularly, and staying invested, teens can build significant wealth with minimal effort. With simple steps like opening an account, starting small, and using available tools, teens can make compound interest work for them—and secure their financial future.
Sources
Investopedia. “How Compound Interest Works.” Investopedia, 2024, www.investopedia.com/terms/c/compoundinterest.asp. Accessed 20 Sep. 2024.
NerdWallet. “What Is Compound Interest?” NerdWallet, 2024, www.nerdwallet.com/article/finance/what-is-compound-interest. Accessed 20 Sep. 2024.
National Endowment for Financial Education. “The Benefits of Financial Education.” NEFE.org, 2024, www.nefe.org. Accessed 20 Sep. 2024.
Ramsey Solutions. “How Teens Can Build Wealth.” RamseySolutions.com, 2024, www.ramseysolutions.com. Accessed 20 Sep. 2024.
-Giada Verprauskus