Personal finance experts emphasize the importance of starting to save at an early age. The power of compound interest can provide a huge financial advantage for people who begin saving for retirement several years sooner than their peers. Some of us have seen the calculations that show the difference between starting to save in your 20s versus your 30s and how the person who starts saving sooner has a larger account balance at retirement. Most people have reached their older years before they realize this benefit and then can only wish they had started saving sooner. While the benefit of starting to save early may have been missed by older people, they can still help their children benefit from a long time horizon. If starting to save just ten years sooner than your peers provides a large advantage, imagine the benefit of starting to save twenty or thirty years sooner. With some assistance from their families, children can benefit from the power of compound interest while also learning the valuable lesson of saving.

Assume you save $100 per month for your child from her birth to her age 18. If you invested the savings in a diversified stock market mutual fund, and it grows by 8% per year, the account balance would be $48,009 by her age 18. That would be a nice gift for college, but what if she leaves the money alone? If she does not touch the account for the next 47 years, no additions or withdrawals, and it continues to grow by 8% per year, the account balance would grow to $2,036,326 by her age 65. That nice gift for college turns into a nice nest egg for retirement.

In the above scenario, your child does not save any additional money to the account after her age 18. Now assume she continues saving $100 per month to the account after age 18, and it grows by 8% per year. In that case, the account balance would be $2,657,564 by her age 65. Although she continues to save for 47 additional years, the ending balance is only about 30% higher. That shows the true power of starting to save early. The first 18 years of saving produce a balance of $2,036,326, while the last 47 years of saving produce a balance of only $621,238. The reason is the earlier savings experience more years of compound interest growth.

Saving for your children’s retirement may not be a priority, and you should not place that goal ahead of saving for your own retirement, but if you have the ability to invest for your children, they will thank you one day. Imagine if your parents had invested for you in the stock market back when you were a child and how much that investment might be worth today. You would be pleased, and your children would probably feel the same. Teach your children the concept of saving by getting them involved in the process. For example, if you want them to have an allowance of $10 per week, give them an allowance of $15 per week with the requirement they save $5 in an account so their net is still $10. This will teach them that they must always save a portion of the money they earn or receive. Children have the ability to learn the concept of saving at an early age, and parents who teach this to their children pass on a valuable life lesson.