Investing Early and Compounding

As summer approaches, students take jobs to help pay for college and have spending money.  This can be a really good time for parents to start their child investing by opening a Roth account in the child's name.  I would suggest a discount broker, such as Schwab, and a zero commission, broad market exchange traded fund, such as SCHB.  For $3,000, approximately 75 shares can be bought.  Take the child to the brokerage office or sit down with him/her, and open the account online.

A huge hurdle in teaching financial literacy to young people is that it isn't yet relevant.  Taking the step to actually owning shares can be the necessary step towards relevance.  It gives them "skin in the game."

An important teaching point is that this is an investment for 45 years into the future.  This whole exercise will put a young person miles ahead of the typical new hire out of college struggling in his or her first human resources meeting, where some rep of a mutual fund provider is describing investment choices.  I stress this because I constantly see smart young people who come to me and seek advice on how to invest their 401(k).  They don't know whether they should max out on their 401(k) or fund an IRA, and they don't know what funds to choose and how to allocate the contributions.

Starting with a small initial investment early on could very well spark an interest in the process of investing appropriately for one's retirement and even managing family finances.

After taking the steps to getting invested at a young age, students should grasp the importance of starting early down the investment road.  Here is a really good discussion-provoking post on the power of compounding by Joshua Kennon, "A Short Lesson On The Power Of Compounding."  Pounding home the importance of investing young gives young people the means to have choices later in life and  thereby to enable their family to enjoy life more - there are few gifts that can be more meaningful.