How I Plan to Make My Kids Multi-Millionaires on $1,000 a Year

Here's a simple investing fact:

• Given enough time and the benefits of compounding anyone can become rich on almost any amount of money invested.

For instance, consider this:

1. My kids are young -- having 60 or so years before they reach retirement age.

2. If they invest $1,000 per year for 60 years and earn 10% on their money (after taxes), they end up with over $3 million when they retire.

3. Now if they earn some money in those years (which I'm assuming they will -- eventually), they can put the money in a tax-advantaged account like a 401k or a Roth IRA and make themselves earn even more.

4. But best of all, let's say my wife and I give them each $1,000 a year to invest until they get out of college at 22. At which point they start investing themselves -- let's say $500 more per year for every year until they reach $5,000 a year invested (a number that's certainly not out of the realm of reason for many people) which they keep up until they retire. And they do the majority of their saving in tax-0advantaged accounts that allow them to earn 11% on average through the years. How much do you think they'll have at retirement? $8.6 million.

What if they're super savers and can sock away $10,000 a year? Or $15,000 a year? I think you all get the point -- start early enough, invest as much as you can and work to get the best return possible and you will become wealthy.

Now someone's going to chime in the comments and say something like, "Yeah, but when they retire, $8.6 million will be worth a lot less than it is now." There's always a kill-joy, half-glass-empty person like this in the crowd. ;-)

Yes, it's true that $8.6 million will be worth less in 60 years than it is now. A lot less, in fact. That said, salaries will also be higher as time goes on, making it much, much easier for future generations to sock away $10,000 a year, $20,000 a year, or even more. Inflation impacts the value of the savings, but it also increases wages, so $8.6 million is no longer a pipe dream, but instead becomes something strong savers can blow by if they want to.

Comments

[Kill-Joy]

Yes, yes, we know. Compound interest is wonderful.

[Tim]

or better yet, give them a $1000 a year to invest, but in a trust

[Duane Gran]

As a fellow parent I empathize with wanting to give everything (and more) to one's children, but my altruism is tempered by sage advice from Dr. Stanley's writing in "The Millionaire Next Door." Many affluent people got that way through hard work and discipline. Furthermore the affluent often cite the trials of making their fortune as a significant expression for what is important to them. Gifts are often squandered because they lack sweat equity on the part of the owner.

Mind you, I'm not making any judgments about anyone's children, but the description of turning one's kids into multi-millionaire's raises a red flag. I like what Warren Buffet said about his plans for bequeathing his wealth to his heirs: They ought to have enough money to do whatever they want, but not so much that they do nothing.

A certain amount of seed money for savings may well establish good habits, but I think it takes some wise shepherding to avoid turning it into blow money.

[kurt]

Good luck with that whole 10% after-tax thing.

[Jonathan]

quote: Good luck with that whole 10% after-tax thing.

Ever heard of this thing they call the stock market? :P

[Marianne]

Slightly off topic, but my son has a tax refund that I think he should invest in a Roth Ira. Can you open an IRA with just a small amount of money- less than $200?