Ask Paul: How to start investing at 16 for long-term wealth?

Should I invest my savings in ETFs, keep building my cash buffer, or start saving for a first home deposit at 16?

Reader question

Dear Paul,

I'm a 16-year-old who is passionate about developing my financial literacy. My question is whether you think that, when I'm 17, it would be a good investment strategy to put most of my income into savings plus Vanguard Diversified Balanced Index ETF (ASX: VDBA).

Then when I get a bit older (say 20-22) incorporate Vanguard Australian Shares Index ETF (VAS) and Vanguard MSCI Index International Shares ETF (VGS) for the long haul.

I plan to leave those untouched, but am looking for medium-term investments, obviously not high-risk, too volatile or pure equity, as I'm hoping to access them in the next 10-15 years (property, business etc). - Esther

Paul's recommendation

I am delighted your personal finances interest you. As you know, one of the real truths about money is compound interest - and time is its best friend.

Apart from investing in my uni education and a small amount of money my parents put into shares, I did not get started on the path to financial independence until I was about 27.

Sure, compound returns have worked very well for me and my wife, Vicki, over 40-plus years, but by the time you reach my age of 70, you will have had more than a half century of compounding. Just for fun, let's look at what this looks like. Let's say you start with $5000 and add $5000 a year and see what amount you are likely to have in a fund, such as the Vanguard funds you mention, in about 50 years.

This ignores inflation but, equally, I have not inflation-adjusted your annual $5000 being invested. This strategy would see you with about $2.3 million. I've used the sort of return you would expect from the Vanguard funds you mention, around 7%pa on average. You will be rich.

But here is where I might be able to share something valuable with you. Most of my life as a healthy, fit, active adult has been lived.

Your adult life is just starting. This is so exciting for you. I don't want you to ever lose your financial literacy skills; aim to be a financially independent young woman and maintain this for your lifetime. So much will happen. This is the joy and wonder of being 16.

At 16, I could see school ending and me heading to university in Sydney. I felt strongly I would return to Griffith, NSW, but that idea lasted about a week. A whole new world opened up at UNSW: new friendships, new relationships. These led to me starting my business, ipac securities, with four guys from uni.

I met Vicki. We travelled, had three kids and now four beautiful grandkids. We live a life neither of us could have imagined as 30-year-olds, let alone as 16-year-olds.

So my advice is to keep saving and learning. Invest in the Vanguard funds and build your pot of money. Critically, keep learning how to be good with money, but be flexible and go where life takes you.

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