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Kids as young as 13 are learning that it’s never too early to start investing.
This new brokerage account, first reported by The Wall Street Journal, will allow young users to buy and sell most U.S. stocks, ETFs and Fidelity mutual funds. It comes with zero account fees, zero commissions for online trading, and teens aren’t tied to any minimum investment requirements. Users will also get access to a debit card.
While it may sound like a bit of a departure from the traditional custodial trading accounts that are offered to teenagers’ parents so they can invest on their kid’s behalf, the Fidelity Youth Account does still require parental oversight. In order for a teenager to sign up, their parent or guardian must already have an existing Fidelity account. Parents can then monitor their child’s account activity and set up notification alerts for trades, transactions and spending.
On the heels of the investing firm’s announcement, Select takes a look at how the new Fidelity Youth Account is teaching an important financial concept to teenagers that will serve them well in the long run: the power of compound growth.
The power of compound growth when investing
Your investments in the stock market can grow significantly over time through compounding.
When you hold an individual stock over a long period of time, your earnings are constantly being reinvested, otherwise known as compounded. The longer you leave your money and returns in the market, the more your returns are compounded over time. It’s the same as how the interest you earn on money in a savings account is compounded and grows over time, though you typically earn more on your money in a brokerage account (in exchange for taking on more risk).
This compounding effect of investing essentially means that you’re generating earnings on top of your reinvested earnings. While investment returns certainly fluctuate day to day and year to year, over time, if the stock performs well and you continue to outpace the rate of inflation, the money you originally invested can balloon. And the longer your money is invested in the market, the more time you have to see it grow.
The power of investing when you’re young
To show you how compounding through investing works better the earlier you start, we compared the earnings of someone who starts investing at age 13 versus someone who starts 10 years later at age 23.
Using this compound interest calculator to crunch the numbers, we assume that both the teenager and the 23-year-old make an initial investment of $100 and continue to contribute $100 a month. Historically, the average stock market return hovers around 10% annually, but we used a conservative rate of 7%, compounded each year, to adjust for inflation.
The chart below shows how much money a 13-year-old and a 23-year-old could earn on their investments by age 67, the full retirement age, plus how long it will take each to save $1 million.
Investing starting at age 13 vs. 23
|By age||13-year-old’s investment earnings||23-year-old’s investment earnings|
The person who starts investing at age 13 reaches millionaire status by age 74 simply by investing $100 month over month for 60+ years. Meanwhile the person who started investing at age 23 doesn’t reach $1 million until age 84. At this point, the younger investor has over $2 million.
What’s perhaps more significant than the millionaire status is looking at how much more money the younger investor has saved if they want to retire at age 67. They would have $648,640.95 in their investment account, which is double what the older investor would have at that same age: $321,307.87. This shows you how the earlier you begin to take advantage of compound growth, the faster your money can grow over time.
Of course, if you wanted to save even more for retirement, you could slowly increase your contributions year over year as you earn more money. Even a small increase of 1% per year can make a big difference.
Ready to start growing your retirement fund through compounding?
Investing in an individual retirement account (IRA) is an effective way to see your money grow through compounding — and make sure you’re setting aside a nest egg for your future nonworking years. Opening an IRA is even more crucial to do if you don’t already have a 401(k) plan offered by your employer.
IRAs are tax-advantaged investment accounts that offer a range of investments for your money, such as individual stocks, bonds, mutual funds, CDs and cash. You can set up automatic contributions into your IRA from your checking or savings account.
To help you narrow down the best IRA accounts for your money, Select reviewed and compared over 20 different accounts offered by national banks, investment firms, online brokers and robo-advisors.
Beginners should consider Fidelity Investments IRA, and those who want a more hands-off automated investing approach, Betterment IRA is a clear winner. Both don’t require a minimum deposit to start off, and they offer commission-free trading of stocks and ETFs, plus provide a variety of investment options and have educational resources or tools to help all sorts of investors.
Even if you didn’t get started at 13, it’s never too late to start saving for retirement and taking advantage of compound growth.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.