The Motley Fool Investment Guide for Teens: 8 Steps to Having More Money Than Your Parents Ever Dreamed Of - Couverture souple

Step 1. Set Goals (and Reach Them)

Success to me is having ten honeydew melons, and eating only the top half of each one.

-- Barbra Streisand

What does success mean to you? If you're like many teens, success might be excelling at school or in athletics, getting into and thriving at the college of your choice, preparing for a career you'll love, finding the perfect boyfriend or girlfriend, or just not making a complete idiot of yourself in public!

Since this is a financial book, think for a moment about what success means to you financially. Hey, we know that up till now, you might not have given it a moment's thought. So humor us. You might start by thinking, Success is...well...hey, I just want to be rich! So let's start there. How would you define "rich"? Today, 40 percent of the world's population, more than two billion people, struggle to live on less than $2 per day. Viewed from that perspective, you're already stinking rich. In that context, virtually all Americans are.

We asked a bunch of teens to define "rich," and the answers varied widely. Some thought that if you made $250,000 per year, you were rich. Others thought having $2 million or $5 million stashed in an account would do it. One explained that if you had enough money in the bank to live comfortably just off the interest (payments a bank makes to you for keeping your savings with them), without working, then you were rich. The common thread running through most of the responses was that you're rich if you're able to buy what you want, within reason.

What's "reasonable"? It's probably not reasonable to anticipate owning mansions in three different countries, driving a Porsche with a Bentley in the garage, and having a large staff (masseuse, fan waver, grape feeder, foot rubber, and palm reader) tending to your every wish. You may not even want any of that stuff. It is reasonable, though, to aspire to someday own a house you love, one or two cars for your family, and enough of the things that give you pleasure that you call yourself content with life. Stuff like musical instruments, pets, maybe a boat, a home entertainment center, a fast computer, a decent wardrobe (um, less than fifty pairs of shoes, please), workout equipment, shelves full of books...and an android (gotta have an android).

Take a few minutes now to list some of your goals and dreams, both long- and short-term. You might think this a silly exercise. But ain't it peculiar how few people spend time thinking out and writing down their dreams? Dream a little. What do you want to be, to do, to call your own? Then estimate how much you think each one would cost (some will be easier to guess at than others -- and some will have no associated financial cost).

My Goals and Dreams

I want to be: Estimated Cost:

______________________________________ $___________

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I want to do:

______________________________________ $___________

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______________________________________ $___________

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I want to own:

______________________________________ $___________

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We've got some good news for you. And then some even better news. Chances are you can meet a bunch of your goals even if you don't read our book. Just be ambitious for them -- whether it's hiking the Himalayas or starting your own bookstore or writing for The Simpsons.

All of that said, if you do learn the basics of your money with us, you'll likely reach more of them -- perhaps even all of them. Without robbing any banks, without saving and overpolishing every penny you ever get your hands on, without sacrificing joy, you can finance the dreams that need financing. If you get started now.

Time for a relevant tale.

Anne Scheiber: From Simple to Substantial

In 1932, Anne Scheiber was a thirty-eight-year-old auditor for the Internal Revenue Service. Attracted by the promise of the stock market, she forked over most of her life savings to her brother, a young stockbroker on Wall Street. Disastrously, his entire brokerage firm went bankrupt, and Anne lost all her investments. (Moral of the story -- and you'll find us nodding our heads at this one: Keep a darn close eye on your brother.)

Determined to try again and do it on her own, she then saved $5,000 and plunked it back into stocks in 1944. By the time she died in 1995 (at the age of 101) -- get this -- her money had grown to $22 million -- far more than any of us need in this life.

How'd she do it?

Well, to start, she was a long-term, involved investor. She wasn't trying to strike it rich overnight. She didn't buy stock today and then sell it tomorrow (something that too many people try, with little success). She attended shareholder meetings and followed her companies closely. She bought big, name-brand companies like Pepsi, Chrysler, and Coca-Cola. She reinvested the money that companies sent her as "dividends," buying more shares of stock with it. And she placed her faith -- and her money -- in these growing companies and patiently watched their earnings expand over decades.

Some years, Anne's companies struggled. Other years, the stock market got hammered. In 1973 and 1974, the market lost nearly half its value. It was a very discouraging time. President Nixon left the White House in disgrace. United States Armed Forces left Vietnam in defeat. The nation's over-reliance on oil from the Middle East sent our economy into a tailspin. And everyone thought the new bell-bottom pants were really cool. We had just about hit rock bottom. But Anne Scheiber held on to her investments. She was rewarded for doing so. When she died, she donated her $20 million plus to Yeshiva University in New York.

How the heck did she do it?

Anne invested relatively little money in the middle of her life, then watched it grow to an enormous sum. You may be thinking, Yeah, but that was decades ago; things are different now. Not so fast! Although a lot has changed since 1944, the stock market is still around, still making people like you wealthy. We'll explain how in subsequent chapters.

Or you might think, Geez, I don't want to wait fifty years to become a millionaire! And that's a fair point. Note, though, that she ended up with more than $20 million. If you're happy with just $5 million, you won't need fifty years. Also, she started with just $5,000 and added very little after that. You can put more than that away in the years ahead, if you're motivated. Start saving and ask your extended family to match every dollar you save. We'll show you how. You'll be there in no time.

If you get started, we think you can have whatever money you'll need to finance your dreams. If you get started now, you'll win, just as Anne Scheiber did. Errr...well, mostly. Because you might not want to do it just the way she did. Why not? According to those who knew her, Anne kept to herself, lived alone in a small New York City apartment, wore the same coat day after day, year after year, and often skipped meals rather than use her money.

So that part's actually quite sad -- sad because it obviously wasn't necessary.

Check this out again: She was worth millions of dollars, but she skipped meals, wore old clothes, and basically had no friends. We're going out on a limb here and speculating that she didn't ever pick up her Motley Fool teen guide and fill out what you just did -- your list of dreams in life. What's clear is that she settled for the sole pursuit of money, rather than the pursuit of money to enhance her life and the world around her. There's a big difference between the two -- a difference that makes all the difference.

Fortunately, you don't need to pinch every penny to succeed in saving and investing. And you have filled out your list of dreams above (if not, go back and complete the task!). We Fools generally love investing and creating wealth alongside the many other pleasures that life has to offer. Stuff like reading books, whipping a Frisbee around an open field, tossing a dart at a world map and traveling there this summer with our two best friends, sleeping late on Sunday, going to movie festivals, swimming the English Channel, or just sitting around making jokes about Dad wearing black socks and tennis shoes. Ya know, the regular stuff.

Anne Scheiber's investment legacy provides a powerful example of what you can achieve if you're methodical and patient with money. She also reminds us, though, to stop, plant, water, tend to, and smell the roses now and then. Both matter.

Great News for You: The Millionaire-Making Magic of Compounding

If you're not the type who enjoys math class, that's okay. If you don't delight in figuring out how long it'll take that plane to get from Phoenix to Denver, no problem. If you don't put on big sloppy grins at quadratic equations, breathe easy. We're going to do a little math together that all of us can enjoy.

It's time to talk about the magic of compounding growth. This mathematical force applied to your money depends on three key factors:

1. How much money you invest.

2. How long you set aside your money.

3. How much your invested money grows each year.

Let's look at some examples. We'll start with a simple one.

We'll start with $100. Your $100. The hundred bucks you set aside after mowing half a dozen lawns or changing a bunch of diapers or just cracking open the birthday check from your grandparents (you lucky dawg). Let's take that $100, invest it in the stock market, and see what happens. It'll earn the market's average yearly gain of 10 percent. Look there, you're already making money. After the first year, your $100 grows to $110. You made ten bucks. After the second year, the $110 grows to $121. Look at that. You made $11. Then after year three, your money grows to $133. Even though it climbed the same 10 percent, you made $12.

Interesting. But kinda boring, right?

Well, now let's watch it over longer periods of time.

Growing $100 over Time

Start with $100. Grow it by 10 percent per year. And here's what happens:

Year Total Add 10%

1 $100 $10

2 $110 $11

3 $121 $12

4 $133 $13

5 $146 $15

10 $236 $24

50 $10,672 $1,067

100 $1.25 million $125,278

300 $238 trillion $23.8 trillion

Do you see what's happening? It's like watching water trickle, then roll, then storm over a dam. The more water pressure and the more time, the greater the flood. Your initial bundle of $100 is growing, and the dollar amount by which it's growing is also growing. That's compounding. It's a flood. It's the flood responsible for creating the majority of wealth in America today.

Another way to think about this is that the $10 you added kept growing by 10 percent per year, and so did the $11 you added next, and the $12, and so on. It all kept piling up and growing. In just eight years, you double your money. Which isn't that inspiring with just $100. But after fifty years, your measly hundred bucks is worth more than $10,000. And after three centuries of steady growth, your small investment is worth $240 trillion -- enough for your ancestors to own a few planets (and put them all in your name) in the year 2400. And if these numbers don't inspire you, imagine what happens when you save and invest $100 each year, or $1,000 each year, or more. This is how enduring wealth is created.

Growing $100 at a Time

In our example above, we had you set aside just $100 and grow that 10 percent every year thereafter. Now let's look at noncompounding, or linear, growth. In this example, as in the first example, you're setting aside $100 today. But in this one you just add another $100 in savings to your initial sum every year thereafter, but with no annual growth of those savings. No investment, just savings.

As you can see below, you're pretty psyched as you enter year two, when your money doubles to $200 (because you added $100 of savings to it). Remember, you had to wait eight full years for your $100 investment above to double. Congratulations, your savings just doubled your hundred bucks in a single year. Upon the conclusion of year two, you then jumped to $300. Blowout, right? But look what happens after that, and compare to the table from the first example:

Year Total

1 $100

2 $200

3 $300

4 $400

5 $500

10 $1,000

50 $5,000

100 $10,000

300 $30,000

Wow, what a difference. In our compounding example -- where the growth was in percentage, not total, terms -- you have more than $1 million after you tortoised your way through a hundred years. In our linear example, even though your hare got a great start out of the gates, you have just $10,000 to show for your efforts a hundred years later. Truly hare-y. (That will be the only bad pun in this book...we promise.) (Except for the others.)

Compare them against each other.

Year Linear Savings Growth Geometric Investment Growth

1 $100 $100

2 $200 $110

3 $300 $121

4 $400 $133

5 $500 $146

10 $1,000 $236

50 $5,000 $10,672

100 $10,000 $1.25 million

300 $30,000 $238 trillion

To create wealth and live without financial worry, you absolutely must participate in the compounding growth of the bond and stock market. And the sooner the better. Which is why we keep shouting, "Great news for you!" throughout this book. The more years you have, the better the news gets. When you put the linear growth of savings into the geometric growth of investment, you have both columns above working in your favor. In this book, we'll show you how to achieve both.

The Growth Rate

Now that you're getting the hang of things, let's dig just a little bit deeper together. The growth rate -- how fast your money grows, on average, from year to year -- is very important. Let's start over, using $100 again. This time we'll compound its growth at three other yearly rates: 5 percent, 11 percent, and 13 percent. Five percent is what you might earn in interest in a money-market account (a long-term savings account at a bank). Eleven percent is the historical average growth rate of the stock market for most of the last century. Thirteen percent is how fast your money might grow if you wound up being an interested, self-motivated, and successful stock picker. The first two rates, 5 and 11 percent, you can earn with virtually no effort. We'll show you how in the chapters ahead. Thirteen percent, though, will demand extra work on your part. More on that later.

Compounding at Different Rates of Growth

If you start with $100 and it grows at 5 percent, 11 percent, and 13 percent, here's how much you'll have after the following perio...

David Gardner learned from his father how to invest, and with his brother, Tom, started The Motley Fool in 1993 with a mission to educate, amuse, and enrich. Today, the Fool works to empower individual investors, reaching millions every month through its website, premium services, podcasts, radio show, newspaper column, and more. With Tom they have coauthored several books, including You Have More Than You Think, Rule Breakers, Rule Makers, and The Motley Fool Investment Guide for Teens.

Tom Gardner learned from his father how to invest, and with his brother, David, started The Motley Fool in 1993 with a mission to educate, amuse, and enrich. Today, the Fool works to empower individual investors, reaching millions every month through its website, premium services, podcasts, radio show, newspaper column, and more. With David they have coauthored several books, including You Have More Than You Think, Rule Breakers, Rule Makers, and The Motley Fool Investment Guide for Teens.