Thursday, July 13, 2006

Beating the minimum to invest rule - and why kids (and their families) should do it.

Double Your Money Fast
When I was in middle school and high school, I would talk to my grandfather about investing. He would talk to me and teach me neat tricks like the Rule of 72. Being interested in math and money, I was quickly interested. However, I found that the most difficult issue for me was that investing was so expensive. Even through college I was never able to get enough cash together for the minimum that was required for an initial investment in a mutual fund. My grandfather would simply say that the solution would be to save the money in a savings account until I had enough.

This was difficult and it was not until I was able to start working at a job after college and had a 401k that I was able to do this, mostly because the money was gone before I even noticed it. This brings me to the main idea here. Although many of the nicer funds that I would like to get into today have high initial minimum investments like Vanguard, I don't feel pressured or upset by that anymore. The reasons are simple: e-trade and ETFs.

Its Easier to Invest Now than it used to be
With tools like E-Trade and Sharebuilder, virtually anyone can get into the investing game. All you need is a bank account and a computer with an Internet connection. ETFs are Exchange Traded Funds. These are quite similar to mutual funds in the sense that they are not a single stock but rather a basket of stocks which means that your investments are automatically diversified.

So, with even a small amount like 250 dollars, you can reasonably start investing and building an account. Most services charge between 8-15 dollars per trade though, so it is best to choose only one particular mutual fund or etf at a time to reduce the costs. However, with even a small amount invested regularly and arranging for the dividends to be reinvested, it is simple to start building wealth.

Building a retirement account when kids are young
And since time is the biggest factor in any kind of investing, the sooner you start the better. If when you are 14, you are able to sock away 250 dollars every 3 months in this manner, that is 1000 per year, yielding an estimated 3785 dollars by the end of 3 years assuming a quarterly rate of return of 2.5%. This money at age 18 could be left alone until retirement at age 68 (with NO additional contributions) and the same kind of interest averaged at 10% yearly, to provide a retirement fund of 445,000 dollars. This is very little money for a huge retirement return.
(To be fair, the idea for these calculations came from an article on MSN Money, but I think my version is more realistic.)

Given the unstable state of Social Security, a small amount of money from relatives and odd jobs could add up to a hefty chunk of a great retirement for little grandchildren or nephews when they get old....

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