Everybody should save for retirement. Retirement is when a person stops working for a living and starts spending money from savings accounts. Retired people can live in comfort and enjoy their spare time if they stay healthy and save enough money. As a young person, you can plan on retiring with a lot of money if you invest it for a long time and get a good education.
Investing occurs in banks and companies who belong to the world’s financial system. Investing is the process of giving money to people who pay back more than you gave them. You make your money ‘grow’ by reinvesting all the extra money returned to you. The money that you invest is called the principal. You can lend the principal or use it to buy stock. People who borrow the principal make a promise to pay it back with extra money called interest. People who keep the principal give you shares of stock in a business or investment fund. When you own stock, the business or investment fund may occasionally share their profits by paying you money called dividends or cash distributions. You can sell stock for either more or less money than the amount of principal that you paid, depending on how much money the buyer is willing to pay1. The longer you wait to sell a good stock, the better your chance of making a profit.
One of the important goals of investing is to retire with enough money to live comfortably. You have about 50 years before retirement, which is a big advantage if you start investing now. Suppose you invest $1 a year in the stock market and reinvest all the extra money returned to you (this is a good method of investment called “compounding”!). In 50 years you could expect to have $464 by investing only $51 of your own money. Investing $100 a year in the same way will get you $46,444 for payments that add up to $5,100. If you invest $2,160 a year for 50 years, you could receive $1,000,000 (one million dollars) by paying $110,160. Becoming rich is possible by managing money wisely, investing regularly, and getting a good job after graduation from school. [You can begin with small payments and increase them when you get a good job! Click on this Investment Returns calculator to create your own plan].
Many people in the financial system are honest, but there’s always the chance you can lose money from making a bad investment, paying too many fees to professional investors, or dealing with a dishonest person. That’s why you need good advice from people you trust (parents, reference librarians, books, accountants, etc.)2. There are four important steps to investing for 50 years:
(1) SAVE money now
(2) INVEST in stocks
(3) PROTECT your investments
(4) DIVERSIFY your portfolio
SAVE money now
Now is the time to begin saving money in a bank account that pays interest. Your money is safer in the bank than at home. Plan on saving at least 10% of the money you earn from allowance, gift money, and job money (10% of a dollar is ten cents)3. Later on you will use your savings to invest in stocks and pay for other important things. Ask your parent or guardian to open a bank account for you so that you can save money to invest.
Advice: Don’t spend money on things you don’t need. Fun is something that you definitely need, but don’t spend too much money on having fun.
Advice: Save money for the rest your life.
INVEST in stocks
Use the money that you save to invest in stocks. The way to start investing is to open an an investment account with the help of your parent or guardian. Think of your first investment account as a retirement account and later on start your own Individual Retirement Account or 401k Plan when you get a regular job. You want the manager of your investment account to prepare tax statements and send you periodic statements on the account’s value.
The best way to invest in stocks for 50 years is to buy shares of an index ETF or index mutual fund that invests in most of the stocks listed in the U.S. stock market. Be sure to enroll in the index fund’s automatic reinvestment plan to ensure growth of your investment4. I know at least three ways to start investing in the stock market [please see the Appendix at the end of this post]. You can also find stock and index fund dealers through an online search of stock brokers (e.g., Online Stock Trading Review, NASDAQ).
Advice: Be a thrifty investor. Use an automatic reinvestment plan to accumulate wealth from the stock market and never pay unnecessary fees1-4.
Advice: Be a thrifty investor. Plan to invest your earned income in an Individual Retirement Account and take advantage of the 401k Plan offered by your employer1-4.
PROTECT your investments
Right now your parents, banker, and investment account manager help protect your savings and investments. But when you become an adult you should build walls of protection against losing money and review your investments. The strongest walls of protection are employment, money management, and insurance.
- Employment provides money to live in comfort.
- Planning is needed to pay bills, save money for emergencies, and continue investing.
- Insurance is needed to pay for unusual costs of health care and costly disasters.
Review your investments at least once a year to be sure nothing is missing and that they are performing as expected. Take advantage of any new knowledge about investing that can help you reach your goal. You will get better at reviewing your investments with practice and study.
Advice: Be a wise planner. Don’t spend your retirement savings on other things1-3.
DIVERSIFY your portfolio
All the investments that you own are called an investment portfolio. When you become an adult, be sure to diversify your portfolio to avoid losing money to the financial system. Diversify means to own a mixture of financial assets such as stocks and bonds. Many good investors put 60% of their money in stock index funds and 40% in bond index funds1-4.
With good advice and planning you can save for retirement and get a good education. Investing for retirement is a goal worth having. Start now so that your investments have plenty of time to grow. Invest just 10% of your money for retirement and use the other 90% for other things, including saving for a good education.
After graduation from high school consider getting a college education or enrolling in a technical training program to prepare for a career. A good job will allow you to invest more money as you get older and you will be rewarded with a lot more money for the effort. You don’t have enough time to save all the money needed to pay for a college education. You are going to need help, so start asking for help now. Read good books and ask for advice from people you trust.
1. Fred Barbash, Investing Your Money (Exploring Business and Finance). Chelsea House Publishers, Philadelphia, 2001. [The best book for pre-teen readers]
2. Tim Olson, The Teenage Investor. McGraw-Hill, 2003. [A reputable and inspirational book for teenagers]
3. George S. Clason. The Richest Man in Babylon. Penguin Books, New York © 1955, .., 1926. [A good explanation of money management for teenagers]
4. John C. Bogle, The Little Book of Common Sense Investing. John Wiley & Sons, Inc. Hoboken, 2007. [The best book about stock index funds for college students]
I know at least three ways to start investing in the stock market. The first is by opening a brokerage account at a discount brokerage firm. I use Charles Schwab & Co., Inc., as an example because their representatives are helpful and give good advice on the telephone (877-673-7970).
- Schwab requires your parent’s email address and charges $100 to open the account. Your $100 deposit can be invested right away or saved in Schwab’s bank until you’re ready to start investing. Their bank pays interest on all deposits. Schwab does not charge any fee to invest in its index ETFs or index mutual funds. Otherwise, a variety of fees may be charged for other mutual funds (Schwab’s representative can explain those fees). Schwab charges an $8.95 commission to sell shares of a stock or shares of an ETF issued by a different company.
Second, buy an index fund from a mutual fund company. I use the Vanguard Group, Inc., as an example because their representatives are helpful and give good advice on the telephone (800-319-4254).
- Vanguard charges between $1,000 and $3,000 to invest in a Vanguard mutual fund. The price depends on the fund you select. Additional investments can be made for $100. Vanguard’s representative can help you select a mutual fund.
Third, make a direct purchase of stock. I use GE Stock Direct as an example because the General Electric Company (GE) is a famous stock that pays dividends. GE Stock Direct is accessible through the Computershare Trust Company, N.A. (800-522-6645).
- GE Stock Direct charges $7.50 to open the account and at least $250 for the initial purchase of GE stock. Additional purchases of $10-$10,000 can be made weekly. The share price is the average of the trading day’s high and low share prices. The purchase fee is $1 per electronic transfer from your bank or $3 for your mailed check. GE Stock Direct also charges a redemption fee of $10 + $0.15/share to sell shares of stock. The selling price is the “same day’s price” before 2:00 pm EST or the current market price on the next day after 2:00 pm EST. GE Stock Direct will transfer your shares to another person at no charge either in the form of certificates in the name of the recipient or to the recipient’s account. The transfer agent is the BNY Mellon. GE Stock Direct’s operating structure is designed for long term investment that makes it impossible to participate in day trading.
Schwab, Vanguard, and GE Stock Direct commonly operate in the following ways:
- Children must open a custodial account with their parent or guardian. The child must have a social security number.
- Dollar cost averaging is encouraged by the vendor
- Automatic reinvestment plans are offered free of charge.
- Tax and Account statements are sent to an email address provided by you. Beware that GE Stock Direct does not send tax statements; the shareholder must keep own tax records by saving all account statements.
- Tax-deferred retirement accounts can be opened when the owner starts receiving earned income. A maximum $5,500 can be invested every year. GE Stock Direct does not offer tax-deferred accounts.
- Shares are held in book-entry form
Copyright © 2013 Douglas R. Knight