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April 20, 2021, 2:35 p.m. EDT

Teach your kid the magic of compounding so they can retire rich

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Riley Adams

They say youth is wasted on the young, but when you apply that to investing, the opposite is true. 

In fact, youth is on your side when it comes to investing. Developing healthy money management habits early on in life is vital. It will set you up for financial success throughout your career and personal journey. 

If you begin when you’re young, time and compounding are your most important assets. Why, exactly? Well, compounding is the process of your money growing exponentially, or snowballing, over time. 

Say, for instance, that you put $1,000 into the stock market, assuming a 6% annual return. That means that the following year, it will be worth $1,060, and the year after, $1,123.60. 

With compounding, you make money on the initial amount you put in, or the principal, and on the interest or gains each year thereafter. Essentially, you’re earning gains on gains.

Read: Save $1,000 a year, retire with millions

Everyone can benefit from compounding

The benefits of compounding apply to virtually all families. Start contributing $10 per day to your child’s college savings account when they are 1 (assuming a 6% annual return), by the time they’re 18 they would have about $120,000 saved. That’s real growth. 

As you can see, it doesn’t take much effort for your money to grow over time, and investing apps for kids are key to building meaningful wealth. 

For parents, one of the easiest ways to begin educating kids about money is to make it fun and to look for teachable moments. 

For example, open a joint savings or a custodial account for your child . For a savings account, you can work through a traditional bank or online-only bank, and for a custodial account, you can open an account with companies like Fidelity, Schwab, Vanguard, UNest  and more. 

Many of these companies make it easier than ever for parents to open a tax-advantaged investment and savings account for their children. 

If you’re not familiar with a custodial account, it is a financial account that an adult controls, generally a parent or a legal guardian, for a minor. These types of accounts offer enormous flexibility in what you use the funds for, and they can make for a wonderful, highly educational gift for your child. 

Read: Want more money for retirement without a lot of effort? Ask your company about this perk

Healthy money habits that last a lifetime 

Another idea is to set an allowance. Decide on a reasonable amount your child will receive each month for completing specific tasks. This will teach them healthy money habits early on and incentivize them to work. 

You could even go a step further and empower them to negotiate a raise by taking on additional jobs or responsibilities. 

You often have more impact instilling money habits when done as an interactive process. Leverage technology. 

There are a myriad investing apps for minors, products and educational tools available to children and teenagers looking to start investing

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