Teaching your young adult children about money can be a challenge. Even a recent college graduate often lacks the life experience needed to understand the range of benefits a well-thought-out financial plan can have on future life choices.
For a 22-year old, the idea of retirement is impossibly far off. It’s almost incomprehensible. Still, what a young professional can wrap their heads around are the more immediate, short-term life advantages that can be achieved when there’s a flush savings account to fall back on.
A cash cushion is not merely about the accumulation of assets. Instead, it’s about the sense of freedom that comes with knowing you have the money available to make life choices that align with your integrity and long-term vision. In short, having money in the bank broadens available options. Like the ability to scale back work hours for a few years to raise a child. The freedom to accept a high-potential job with a low starting paycheck. The power to jump ship when an employer’s ethics are misaligned with your own. Simply, the comfort of a smoother ride when life doesn’t turn out exactly as planned.
The early bird gets the worm
A young professional’s most distinct advantage is that of time. Sadly, most young people — who are poised to benefit the most from a long savings horizon — don’t fully understand the great earnings potential behind regular, incremental deposits when made over long periods of time.
Take the following three hypothetical savers, for example. Each puts money aside in a 2 percent Certificate of Deposit (CD) for 20 years, at a rate of $10,000 per year.
One starts saving at age 25, the next at age 35, and the last at age 45. Each saves the same lifetime dollar amount and earns the same hypothetical saving return of 2 percent, and then leaves the balance alone until they reach age 65.
The results are staggering. The 25-year-old saver earns more than $368,000 dollars while the 45 year-old ends up with $120,000 less. Those very different saving results will yield drastically different retirement lifestyles. The only difference in strategy? Timing.
And, it’s worth noting, this example assumes the savers in this example chose a very conservative savings vehicle. If they chose to put that money in a broad-based mutual fund or ETF instead, the results could be substantially more significant.
Slow and steady wins the race
In the end, having a flush savings account to fall back on can give a worker the power to act with integrity. When there’s a freedom fund available to tap, they can make choices that best suit their needs. They are not ultimately beholden to the whims of their employers. That’s the kind of money lesson any young professional can get behind.