#conversation: the young should invest for retirement.

May 30, 2014

American youth should be investing for retirement regardless of their socioeconomic status. First comes money management, then investing. There are practical barriers to this model that can be managed with the help of educators and nonprofit organizations. My daughter recently asked what would happen to the markets if everyone suddenly began investing in index funds.

Hey Kids, money is important

April 16, 2014

Three reasons for liking money: The best is that it buys things you want at today’s prices. Another reason is that it will buy things in the future. And the third reason is that it represents the trading value of goods and services (1).


Most people aren’t given a lot of money. They have to earn it and invest it to get rich. They also have to protect it against ‘risk’. Think of risk as your chances of losing money. Here are some easy ways of losing money:

  1. Theft. People may steal your money unless you put it in the bank and keep your bank account’s password a secret.
  2. Overspending. Save money for things that you will need in the future. Otherwise, you are spending too much money. Another way of overspending is to borrow money to buy things that you don’t really need. The best way to avoid overspending is to plan a budget.
  3. Debt. Using a credit card or taking a loan are two different ways of borrowing money from somebody called a lender. Before borrowing the money, you must sign a contract that requires you to repay the lender on time with an extra amount of money called interest. All of the money that you owe is called debt and refusal to repay the lender may eventually prevent you from buying things. Don’t borrow money unless you need it for an important reason (such as education) and use a budget to manage your debt.
  4. Unemployment. Unemployment occurs when people can’t work for money. Avoid unemployment by getting a good education and learning good skills. Don’t drop out of high school before graduation.
  5. Disasters. Accidents, illnesses, wars, and severe weather conditions are disasters that require a lot of money to survive the damage. Adults can buy insurance that will help pay for illness, injuries, and property damage.
  6. Inflation reduces the purchasing power of money.
  7. Citizens are required to pay taxes on the money they earn.


Money’s ability to pay for things is called purchasing power. It’s no secret that the purchasing power of money changes over time. Today the price of a Big Mac™ hamburger is nearly five dollars. But 50 years ago, the price of a Big Mac™ hamburger was only 45 cents. What happened over 50 years? The prices of most things went up, including the price of hamburgers. The increase in prices over time is called ‘inflation’.

You can be sure that today’s money will buy less in the future due to inflation. The best way to protect against the effects of inflation is to start investing money as soon as possible.

Investing money

Think of  ‘investing’ as a good way of using money to earn more money. The money that you earn is called a profit or a return. Investing is a lifetime skill worth learning now.

The risk of investing is that you will lose money. If you don’t want to risk losing money, invest in U.S. Government Bonds. The government always repays your money plus a type of return called interest.

Stocks are risky investments that often pay a higher return than U.S. Government Bonds. When you buy shares of a good stock, you must sell them at a higher price to earn the type of return called a capital gain. Try to avoid losing money by selling the shares at a lower price than you paid; that kind of loss is called a capital loss. The longer you wait to sell shares, the better your chance of selling them at a higher price. Some good stocks also pay small amounts of cash called dividends.

Investors who don’t have the time or interest in selecting a good stock can earn the average return from a large group of stocks by purchasing shares of a stock index fund. Investing in a good stock index fund is less risky than investing in a good stock.


Investors must pay part of their returns to the Government by paying taxes. Employees are able to pay lower taxes on their returns by investing in tax-deferred and tax-free retirement accounts. If you earn wages as an employee, you may be able to invest in tax-deferred accounts known as the traditional individual retirement account [IRA] and the employer sponsored 401(k) account. Tax-deferred accounts protect you from paying taxes on returns until you start withdrawing money after retirement. You may also be able to invest in tax-free accounts known as the Roth IRA and the Roth 401(k). After you pay regular taxes on your wages, you never pay taxes on money that you withdraw after retirement. Employers, tax advisers, and librarians can provide information that you need to know before using these important retirement accounts.

Making the most of your money

Click into this money management website to get good advice on managing and growing your money.

Copyright © 2014 Douglas R. Knight


1. Free exchange. Money from nothing. The Economist, 3/15/2014.

Youth investment clubs

April 8, 2014

Investment clubs are broadly designed to educate members and facilitate their investment activities (1). Among the types of youth clubs are family investment clubs, which allow children and teens to be members, and student investment clubs, which restrict the membership to students (2). Adult clubs generally invest in securities, real estate, private business, or a combination of these investments (3).

Student investment clubs primarily function as learning laboratories for investing in stocks (4-9), running a business (10,11), or understanding finance (11-13). Participation in any of these activities is almost certain to improve students’ investment and money-management skills. Student clubs generally provide simulation games or trading experience.

Simulation games

Stock market simulation games with pretend investment portfolios are especially suited to school clubs of all ages (8,12). Community organizations also sponsor investment clubs, business training, and money management training (6,7). Students of all ages can also participate in online club activities offered by the Future Investors Clubs of America (FICA) (13). The Secret Millionaires Club (10) is an online club that trains young entrepreneurs in the ways of running a business.

Trading experience

Participants in market simulation games may wish to apply their research to buying securities in a personal custodial account (14-16). Some high school (5,8,9) and college (4) clubs purchase securities with real money. When real money clubs are funded by private donors, the profits are retained by the club and may be used for charitable causes (9). When real money clubs are funded by the members, the legal structure is based on custodial accounts for minors (2,14,15) and the tax structure is based on the “kiddie tax” (14). Children at least 14 years of age are required to pay taxes on unearned income over $650 (14). One concern about real money investment clubs is that they teach youth to “trade”, not to “invest” (readers’ comments to Ref. 8).


1. Investment clubs and the SEC. U.S. Securities and Exchange Commission. http://www.sec.gov/investor/pubs/invclub.htm

2. Douglas Gerlach, Can Kids Join an Investment Club?

3. Investment club. http://en.wikipedia.org/wiki/Investment_club .

4. Syracuse University Investment Club, http://www.suinvestmentclub.com/ .

5. Charity student investment project, Grossmont High School. http://grossmont.guhsd.net/index.php/student-organizations/165-student-investment-club

6. Literacy Institute for Financial Enrichment (LIFE). http://www.financialenrichment.org/yip.shtml

7. Teen Investment Club, Indianapolis Jewish Community Center (JCC). http://www.jccindy.org/page.aspx?id=170436

8. Hibah Yousuf, School gives 16-year-olds $100,000 to invest. CNN Money, June 13, 2013. © 2014 Cable News Network, http://money.cnn.com/2013/06/13/investing/high-school-investing-club/

9. David Brancaccio, At a Texas private school, the investment club actually invests. August 27, 2013. Marketplace® Morning Report. http://www.marketplace.org/topics/economy/texas-private-school-investment-club-actually-invests .

10. Secret Millionaires Club, ©2010 A Squared Entertainment LLC. http://smckids.com/episodes/.

11. © Junior Achievement USA®. https://www.juniorachievement.org/web/ja-usa/home

12. The Forsyth Country Day School Investment Club. http://www.fcds.org/academic/upper/upper_school_clubs.asp

13. Future Investors Clubs of America (FICA). http://www.futureinvestorsclub.com/index-programs.cfm

14. Brenda Watson Newmann, 401Kafe.com: Getting Kids Interested in Interest and Investing! Infoplease.com, Copyright © 1996 – 2000 mPower. http://www.infoplease.com/finance/commentary/feature/feature_3kids.html.

15. Gail Sessoms, How to start kids investment. eHow. http://www.ehow.com/how_5088565_start-kids-investment.html

16. Investment clubs for teens. © 1995 – 2014 The Motley Fool. http://www.fool.com/search/solr.aspx?exchange-input=&q=investment+clubs+for+teens&source=ignsittn0000001

#Investment-Returns-Calculator for Young Investors

April 9, 2013

3/13/2020 Update:    I am now recommending that you first click on each of the References at the end of this article to review several free online calculators.  They are reliable and well explained!

Original post:     Young people have limited resources for investing money.  But they can still invest if they make a realistic plan.  Simply click on this link, investment returns, to download a calculator that will help plan a retirement savings program.  The calculator predicts several possible outcomes from investing for 50 years.  Here are four examples of how the calculator works for different investment plans:

Jackpot Plan

Suppose you receive a $50,000 Jackpot.  After paying taxes you have $39,600 to invest in a stock index fund with the trading symbol YAY.  Assume that YAY’s annual rate of return is 8%, the stock broker charges a $10 trading fee, the fund manager charges an annual management fee of 1%, and the inflation rate is 2%.  Also assume that you don’t plan to make additional payments and don’t have a job that pays an annual salary.  You make the following entries in the calculator:


[COMMENTS ABOUT DATA ENTRY:  The calculator always assumes that you start investing at an early age and then plan to hold the investment for 50 years; otherwise, no results are displayed.  The white cells contain comments and suggested values; place your cursor over the cell to read the comment, then click on the cell to enter data.]


 The results are displayed next to the cells where you enter data.  In this example, the calculator uses the 8% annual rate of return to compound your investment returns from the stock market for the next 50 years resulting in an accumulated market value of $1,166,204.  The calculator assumes that you automatically reinvest all dividends and other cash payments earned from the market.  The “accumulated market value” will be your retirement savings.  You gave the Jackpot money ($39,600) to a stock broker and he took $10 of the money to pay the cost of trading.  That left a principal amount of $39,500 to invest in YAY.  The calculator subtracted the principal from the accumulated market value to determine the total return.  The total return is how much money you can expect to earn (or lose) from your investment.  In this case, you could earn a total return of $1,126,614 from YAYThe 2% inflation rate will reduce the purchasing power of your retirement savings [e.g., if your favorite book costs $10 today and $20 tomorrow, then tomorrow’s purchasing power = 100*(($10/$20)-1) = -50%; today’s dollar will only be worth 50 cents tomorrow].

SURPRISE!  You can expect to become a millionaire in 50 years, but that nasty inflation will reduce the purchasing power of your retirement savings by -61% to $453,994.

An additional chart is displayed on the graphs worksheet to show the expected growth of your Jackpot during 50 years of compounding the returns:


Dollar Cost Averaging Plan

A generous uncle wants to help you invest in YAY by contributing $2,500 every year until you can continue the additional payments.  A $10 trading fee is taken from each payment and YAY’s manager charges an annual 1% management fee.  You make the following entries in the calculator:


[COMMENTS:  The calculator assumes that you, or your uncle, will pay the stock broker $2,500 at the beginning of every year for 50 years.   At this time, you do not plan to set up an allotment from your future salary.]


The calculator automatically constructs three Regular Payment Plans depending on whether you pay $2,500 at the beginning of every year, every quarter (a quarter is 3 successive months), or every month.  Since your uncle offered to pay every year, we will focus on results from the yearly payments.   The total payment ($127,500) is the sum of the initial payment and 50 additional payments.  The total trading cost, which is the sum of 51 trading fees, reduces the total payment to a principal amount of $126,990.  You can expect the compounded returns to generate a retirement savings of $1,156,463 based on the sum of the $126,990 principal and $1,029,473 total return.



  • Compared to the single payment plan of investing a Jackpot, the dollar cost averaging of yearly payments is expected to increase the purchasing power of your retirement savings; that’s a good deal!  [Inflation reduces the purchasing power of your retirement savings by -50% when making regular payments (better!) compared to -61% when only making one payment (worse!).]
  • Look at the fantastic growth of retirement savings by making the same payment on a monthly or quarterly basis!

Salary Allotment Plan

Not everyone hits the Jackpot or has a rich uncle.  But anybody who gets a good education can plan on getting a job at some time in their life.  Let’s assume that you save $100 a year from your allowance to invest in YAY.  Fifteen years later you start earning $65,000 per year and invest 10% of it.  You make the following entries in the calculator:


[COMMENT:  The calculator assumes that you make the first payment at an early age (e.g., age 10 years) and begin earning wages 15 years later (e.g., age 25 years).]


Your salary allotment plan predicts $1,061,559 of retirement savings.  Inflation reduces the purchasing power of the retirement savings by -37% (best!) when making salary allotments compared to -50% (second best!) when making regular payments and -61% (worst!) when making only the first payment.  Here’s what happens to salary allotments during 50 years of compounding returns:


Thrifty Investing Plan

Two ways of reducing the total cost of investment are to purchase a no-fee index fund that charges a low management fee.  Some discount brokerage firms don’t charge a trading fee for investing in their sponsored index funds.  Some index fund managers charge a very low 0.06%-0.08% annual fee for stock funds that invest in a broad-market index (e.g., Standard & Poor’s 500 Index).  Assume that you repeat the same money management plan that was previously used in the Yearly Salary Allotment Plan, but this time you reduce the costs of trading and management.  You make the following entries in the calculator:


This thriftier investing plan should increase your retirement savings compared to the more expensive yearly salary allotment plan.  The reduced costs of investment predict a good improvement in total return without significantly changing the purchasing power (-38% in this example).


NO SURPRISE!  Thrifty investing can increase your retirement savings [by $271,871 in this example].


Unless young investors have a lot of money, they will probably invest small amounts during their formative years until they get a job in adulthood.  They should still make small investments as early as possible if for no other reason than to start acquiring the skills of money management and investing.  Regularly scheduled investments throughout life are essential to maintaining the purchasing power of retirement savings.  This investment returns calculator helps young investors (and their parents) plan for retirement.

Copyright © 2013 Douglas R. Knight

Links to previously published calculators of compound returns

Previously published calculators predict the long-time return from an initial investment1, a series of annual investments2, a series of monthly investments3, or a mutual fund4.

1.           Dividend.com: http://www.dividend.com/tools/compounding-returns-calculator.php (calculates growth of initial investment)

2.           Moneychimp.com: http://www.moneychimp.com/calculator/compound_interest_calculator.htm (calculates growth of initial investment and annual additions)

3.           Math.com: http://www.math.com/students/calculators/source/compound.htm (calculates growth of initial investment and monthly additions)

4.           SEC mutual fund calculator: http://www.sec.gov/investor/tools/mfcc/get-started.htm (calculates growth of investment after deduction of various fees)

Hey Kids, you can become rich (but it requires work)

March 29, 2013

Everybody should save for retirement.  Retirement is when a person stops working for a living and starts spending money from savings accounts.  Retired people can live in comfort and enjoy their spare time if they stay healthy and save enough money.  As a young person, you can plan on retiring with a lot of money if you invest it for a long time and get a good education.

Investing occurs in banks and companies who belong to the world’s financial system.  Investing is the process of giving money to people who pay back more than you gave them.  You make your money ‘grow’ by reinvesting all the extra money returned to you.  The money that you invest is called the principal.  You can lend the principal or use it to buy stock.  People who borrow the principal make a promise to pay it back with extra money called interest.  People who keep the principal give you shares of stock in a business or investment fund.  When you own stock, the business or investment fund may occasionally share their profits by paying you money called dividends or cash distributions.  You can sell stock for either more or less money than the amount of principal that you paid, depending on how much money the buyer is willing to pay1.  The longer you wait to sell a good stock, the better your chance of making a profit.

One of the important goals of investing is to retire with enough money to live comfortably.  You have about 50 years before retirement, which is a big advantage if you start investing now.  Suppose you invest $1 a year in the stock market and reinvest all the extra money returned to you (this is a good method of investment called “compounding”!).  In 50 years you could expect to have $464 by investing only $51 of your own money.  Investing $100 a year in the same way will get you $46,444 for payments that add up to $5,100.  If you invest $2,160 a year for 50 years, you could receive $1,000,000 (one million dollars) by paying $110,160.  Becoming rich is possible by managing money wisely, investing regularly, and getting a good job after graduation from school.  [You can begin with small payments and increase them when you get a good job!  Click on this Investment Returns calculator to create your own plan].

Many people in the financial system are honest, but there’s always the chance you can lose money from making a bad investment, paying too many fees to professional investors, or dealing with a dishonest person.  That’s why you need good advice from people you trust (parents, reference librarians, books, accountants, etc.)2.  There are four important steps to investing for 50 years:

(1)    SAVE money now

(2)    INVEST in stocks

(3)    PROTECT your investments

(4)    DIVERSIFY your portfolio

SAVE money now

Now is the time to begin saving money in a bank account that pays interest.  Your money is safer in the bank than at home.   Plan on saving at least 10% of the money you earn from allowance, gift money, and job money (10% of a dollar is ten cents)3.  Later on you will use your savings to invest in stocks and pay for other important things.  Ask your parent or guardian to open a bank account for you so that you can save money to invest.

Advice: Don’t spend money on things you don’t need.  Fun is something that you definitely need, but don’t spend too much money on having fun.

Advice: Save money for the rest your life.

INVEST in stocks

Use the money that you save to invest in stocks.  The way to start investing is to open an an investment account with the help of your parent or guardian.  Think of your first investment account as a retirement account and later on start your own Individual Retirement Account or 401k Plan when you get a regular job.  You want the manager of your investment account to prepare tax statements and send you periodic statements on the account’s value.

The best way to invest in stocks for 50 years is to buy shares of an index ETF or index mutual fund that invests in most of the stocks listed in the U.S. stock market.  Be sure to enroll in the index fund’s automatic reinvestment plan to ensure growth of your investment4.  I know at least three ways to start investing in the stock market [please see the Appendix at the end of this post].   You can also find stock and index fund dealers through an online search of stock brokers (e.g., Online Stock Trading Review, NASDAQ).

Advice: Be a thrifty investor.  Use an automatic reinvestment plan to accumulate wealth from the stock market and never pay unnecessary fees1-4.

Advice: Be a thrifty investor.  Plan to invest your earned income in an Individual Retirement Account and take advantage of the 401k Plan offered by your employer1-4.

PROTECT your investments

Right now your parents, banker, and investment account manager help protect your savings and investments.  But when you become an adult you should build walls of protection against losing money and review your investments.  The strongest walls of protection are employment, money management, and insurance.

  • Employment provides money to live in comfort.
  • Planning is needed to pay bills, save money for emergencies, and continue investing.
  • Insurance is needed to pay for unusual costs of health care and costly disasters.

Review your investments at least once a year to be sure nothing is missing and that they are performing as expected.  Take advantage of any new knowledge about investing that can help you reach your goal.  You will get better at reviewing your investments with practice and study.

Advice: Be a wise planner.  Don’t spend your retirement savings on other things1-3.

DIVERSIFY your portfolio

All the investments that you own are called an investment portfolio.  When you become an adult, be sure to diversify your portfolio to avoid losing money to the financial system.  Diversify means to own a mixture of financial assets such as stocks and bonds.  Many good investors put 60% of their money in stock index funds and 40% in bond index funds1-4.


With good advice and planning you can save for retirement and get a good education.  Investing for retirement is a goal worth having.  Start now so that your investments have plenty of time to grow.  Invest just 10% of your money for retirement and use the other 90% for other things, including saving for a good education.

After graduation from high school consider getting a college education or enrolling in a technical training program to prepare for a career.  A good job will allow you to invest more money as you get older and you will be rewarded with a lot more money for the effort.  You don’t have enough time to save all the money needed to pay for a college education.  You are going to need help, so start asking for help now. Read good books and ask for advice from people you trust.

Good Books

1.       Fred Barbash, Investing Your Money (Exploring Business and Finance).  Chelsea House Publishers, Philadelphia, 2001.  [The best book for pre-teen readers]

2.       Tim Olson, The Teenage Investor. McGraw-Hill, 2003.  [A reputable and inspirational book for teenagers]

3.       George S. Clason. The Richest Man in Babylon. Penguin Books, New York  © 1955, .., 1926. [A good explanation of money management for teenagers]

4.       John C. Bogle, The Little Book of Common Sense Investing.  John Wiley & Sons, Inc. Hoboken, 2007. [The best book about stock index funds for college students]


I know at least three ways to start investing in the stock market.   The first is by opening a brokerage account at a discount brokerage firm.  I use Charles Schwab & Co., Inc., as an example because their representatives are helpful and give good advice on the telephone (877-673-7970).

  • Schwab requires your parent’s email address and charges $100 to open the account.  Your $100 deposit can be invested right away or saved in Schwab’s bank until you’re ready to start investing.  Their bank pays interest on all deposits.  Schwab does not charge any fee to invest in its index ETFs or index mutual funds.  Otherwise, a variety of fees may be charged for other mutual funds (Schwab’s representative can explain those fees).  Schwab charges an $8.95 commission to sell shares of a stock or shares of an ETF issued by a different company.

Second, buy an index fund from a mutual fund company.  I use the Vanguard Group, Inc., as an example because their representatives are helpful and give good advice on the telephone (800-319-4254).

  • Vanguard charges between $1,000 and $3,000 to invest in a Vanguard mutual fund.  The price depends on the fund you select.  Additional investments can be made for $100. Vanguard’s representative can help you select a mutual fund.

Third, make a direct purchase of stock.  I use GE Stock Direct as an example because the General Electric Company (GE) is a famous stock that pays dividends.  GE Stock Direct is accessible through the Computershare Trust Company, N.A. (800-522-6645).

  • GE Stock Direct charges $7.50 to open the account and at least $250 for the initial purchase of GE stock.  Additional purchases of $10-$10,000 can be made weekly.  The share price is the average of the trading day’s high and low share prices.  The purchase fee is $1 per electronic transfer from your bank or $3 for your mailed check.  GE Stock Direct also charges a redemption fee of $10 + $0.15/share to sell shares of stock.  The selling price is the “same day’s price” before 2:00 pm EST or the current market price on the next day after 2:00 pm EST.  GE Stock Direct will transfer your shares to another person at no charge either in the form of certificates in the name of the recipient or to the recipient’s account.  The transfer agent is the BNY Mellon.  GE Stock Direct’s operating structure is designed for long term investment that makes it impossible to participate in day trading.

Schwab, Vanguard, and GE Stock Direct commonly operate in the following ways:

  • Children must open a custodial account with their parent or guardian.  The child must have a social security number.
  • Dollar cost averaging is encouraged by the vendor
  • Automatic reinvestment plans are offered free of charge.
  • Tax and Account statements are sent to an email address provided by you.  Beware that GE Stock Direct does not send tax statements; the shareholder must keep own tax records by saving all account statements.
  • Tax-deferred retirement accounts can be opened when the owner starts receiving earned income.  A maximum $5,500 can be invested every year.  GE Stock Direct does not offer tax-deferred accounts.
  • Shares are held in book-entry form

Copyright © 2013 Douglas R. Knight

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