If you’re a teen or the parent of a teen reading this, we have some very compelling numbers to show you that we hope will convince you to consider saving at least some of that summer pay.
Very simply, working this summer could start you on the path to being a millionaire!
The key to reaching $1 million: Save early and often
When you’re starting out at your first job, the idea of retirement seems a million miles away. Life can take you in so many different directions over the decades, but this much is certain: Getting off on the right foot by saving early is a smart idea.
If you can manage to save just a little bit while you’re still under mom and dad’s roof, you’ll be much richer for it down the road.
In order to save any money, you need to have a job. Now, you may not think summer work pays very well. But the thing about financial planning for the future is that it’s not about the money you earn; it’s about the money you save.
Need proof? Just look at the examples of the janitor who stashed away $8 million or the librarian who was worth $4 million. They did not work in high-paying fields. They got rich by scrimping, saving and having time on their side.
Using a Roth IRA to your benefit
If you manage to save money from a summer job, you’ve got to earmark it for long-term investment.
In fact, that’s the very definition of what it means to be an investor: It means to take money that you won’t need for many years and make it grow. Typically, the means putting it to work for you in the stock market.
Don’t worry, you don’t need to know much about Wall Street to get started investing. You just need to pick the right vehicle for your money.
Here’s what you need to know about the Roth IRA
If you have earned income this summer, money expert Clark Howard’s preferred savings vehicle for you is a Roth IRA.
RELATED: How to open a Roth IRA
With a Roth, you get an individual retirement account where you can squirrel away after-tax income up to $6,000 per year. Your earnings on the account grow tax-free, and when it’s time to make withdrawals way down the road, the money you take out won’t be taxed either.
But remember, the Roth is just the vehicle. Clark compares the Roth to being like a house. It’s an empty shell that you’ve got to put some furniture in. The “furnishings” you pick are the stock investments you put in your Roth.
We’ve got an easy five-step guide to opening a Roth IRA and picking your investments right here.
CHART: Who wants to be a teenage millionaire?
OK, here’s the part where we show you the money! Below you’ll see how your nest egg can grow over time.
Before we get to the good stuff, let’s state the basic premise:
If you contribute $2,000 annually to a Roth IRA for 10 years early in life, it can grow to $1 million by your 70th birthday.
Now, a couple of caveats here:
- First, you have to do this from age 15 to age 25 to make it work.
- Second, you can never make any withdrawals from your Roth IRA until age 70.
- Third, this method assumes annual growth of 8% by investing your money in a low-cost index fund.
That last part is an ironclad rule. No withdrawals when you want to buy your first house. Or when you run into medical debt. Or when you lose a job and need to support yourself until you find other employment.
If you do make any withdrawals, the numbers won’t work.
A word about the annual growth rate: While 8% may sound like a lot, it’s helpful to keep in mind that the S&P 500 has seen an average annualized total return of 9.8% over the past 90 years.
(Editor’s note: The S&P 500 is an index that tracks the financial performance of the 500 largest companies in the United States.)
So, without further ado, the chart…
|Time frame/Age||Contribution amount||Growth total|
|Year 1 (15 years old)||2,000||2,160|
|Year 2 (16)||2,000||4,492.80|
|Year 3 (17)||2,000||7,012.22|
|Year 4 (18)||2,000||9,733.20|
|Year 5 (19)||2,000||12,671.86|
|Year 6 (20)||2,000||15,845.61|
|Year 7 (21)||2,000||19,273.26|
|Year 8 (22)||2,000||22,975.12|
|Year 9 (23)||2,000||26,973.13|
|Year 10 (24)||2,000||31,290.98|
|Years 25-69||ZERO ADDITIONAL CONTRIBUTIONS!||N/A|
|At your 70th birthday||998,822.14|
Commentary on the chart
The power of compound interest is what makes this all possible. Don’t believe the numbers? Play around with them yourself using this compound interest calculator.
You may have heard the oft-quoted maxim from Albert Einstein that states, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
But until you see the numbers staring you in the face, it can be hard to understand.
The real beauty of this plan is that you never have to contribute another penny toward your Roth IRA again after doing it for 10 years.
And because you’ll be making contributions during your early days while you may still be living at home with mom and dad anyway, this plan will hopefully be that much easier!
Of course, we here at Clark.com encourage you to keep saving past your 25th birthday, but you get the idea!
More money-related stories on Clark.com:
- 23 easy ways to make extra money each month
- The best websites and apps to sell your stuff
- How to get out of debt in 5 simple steps