MSU Extension

It may seem odd to talk about retirement while in your teens, but if youth incorporate some good habits and practices early on, they can have a great impact on their future earnings. If youth get over the live for today attitude and take action on their future, they can obtain financial freedom and possibly early retirement. Time is on their side as a teen.

It can be tough to save when you think you don’t have any money. This is especially true when you are young and starting out. Youth may want that cool new piece of technology or latest fashion, but if they can hold off some now and save, it can be the best time to reap the benefits. Even if you have started putting away money for college ($5 per week = $20 per month = $250 per year = $1,000 per four years), you might consider taking a bit of that for your future self! By curbing expenses, saving a small portion of your paycheck or working at an odd job, that little extra money put into savings can pay off big time! Time is on your side and it can be a major asset to increasing your future retirement. Michigan State University Extension explains how.

With the magic of compound interest and time, that small amount put into an account monthly or annually has time to grow. Dave Ramsey gives an example in “How Teens Can Become Millionaires” of two teens and how they became millionaires. In his example, Ben invested $2,000 a year starting at age 19 with a 12 percent interest rate, but stops investing at age 27. Arthur doesn’t start investing his $2,000, at 12 percent annually, until age 27. Both wait until age 65 to retire. At that time, Arthur retires with $1,532,166 while Ben, who hadn’t put in any money for the last 38 years will have $2,288,996. That is a $756,830 difference! Not to mention Ben only put in for eight year ($16,000) and Arthur put in for 38 years ($76,000). Again, time is truly the asset here and that’ the power of compound interest. Look for more information on calculating compound interest and its advantages by visiting Math is Fun or go to Investor.gov for a compound interest calculator to see what you might end up with by just stocking away a small amount of savings.

A recent article in Forbes Magazine points out three of the top money to-do’s for your 20s. Those three include setting a budget early on and knowing what you can pay your future self in savings. They recommend you try the budget for three months to see how it works for you. The other two “to-do’s” are to build up an emergency fund and tackle your credit card debt. The three months will also allow you to get in the habit of saving and knowing what you can “live on” or learn to live within your means. If you can set it and forget it, it will keep you from disrupting that positive financial force and get you started on good habits managing your money.

Another habit to include early on would be to add any future income to your future self. The raises you may obtain along the way can be directed into your retirement. For example, if you get a 3 percent raise from your employer, you can take all of it or a portion of it and add it to your retirement account. Or use the raise to increase your contributions. You already know how to live off what you are currently taking in as discretionary income, so that extra money shouldn’t be missed. It might better serve you in the future.

The time to tax is now. The other benefit youth can take advantage of is paying taxes now while they are usually earning a lower income. It is very likely your income and taxes will go up in the future. By taking advantage of a Roth IRA or other tax-sheltered investments early in life, it will allow the money to grow, and when you go to pull it out, it’s tax free! The government can’t tax you on that future money and that can be a substantial savings in the future.

The key asset is time. As a young adult, you have that. If you can start saving even a little each month or year and pay it to your future self, the benefits can pay off greatly. These small amounts shouldn’t be a burden on you. This delayed gratification can be tough to bear when the clouds form overhead and financial hardships rain down, but try to see that a small breeze here in the present can make for very clear skies in your future.

For more information on fiscal management or youth money management, please visit the MSU Extension and Michigan 4-H Youth Development websites.