How to Make Your Child a Millionaire

Here's an interesting piece from Money Central on how to make your child a millionaire. The details:

A newborn has nothing but time -- and that's something this strategy exploits to the fullest. Let's say a 30-year-old manages to save up and then invest a lump sum of $10,000. At an annual return of 8%, by the time she's 65, that $10,000 will have grown to nearly $150,000. Not bad, right?

But then compare it to what a 5-year-old could make from the same $10,000. The extra 25 years of growth would give him over $1 million by age 65. A newborn would need just $6,700, less than the cost of a decent used car.

This is all about the power of compounding, folks. Take some money and a lot of time and you can become very, very wealthy. It's just the formula I detailed in How to Get Rich in Three Easy Steps.

That said, I'm still constantly amazed by the power of compounding and how much of a difference it can make. I'm just starting to see some really big benefits from compounding personally as my portfolio is now in a position where compounding is really kicking in. It's a nice friend to have on your side. ;-)

The article goes on to highlight what kids at various ages need to invest in order to be millionaires by age 65. It gives three alternatives: a lump-sum investment, a monthly investment until age 18, and a monthly investment until age 65. Here are the results for the various age levels:

Newborn

• Lump sum invested now to be a millionaire at 65: $6,721
• Monthly contribution until age 18 to become a millionaire at 65: $56
• Monthly contribution until age 65 to become a millionaire at 65: $38

Age 5

• Lump sum invested now to be a millionaire at 65: $9,875
• Monthly contribution until age 18 to become a millionaire at 65: $98
• Monthly contribution until age 65 to become a millionaire at 65: $57

Age 10

• Lump sum invested now to be a millionaire at 65: $14,511
• Monthly contribution until age 18 to become a millionaire at 65: $200
• Monthly contribution until age 65 to become a millionaire at 65: $85

Age 15

• Lump sum invested now to be a millionaire at 65: $21,321
• Monthly contribution until age 18 to become a millionaire at 65: $662
• Monthly contribution until age 65 to become a millionaire at 65: $127

Very, very, very interesting -- and compelling -- information. Imagine socking away $6,721 when your child is born, knowing he/she would be a millionaire at age 65. I know, $1 million would not be worth as much then as now, but it still would be a decent amount for such a small initial investment. Besides, what if instead of $6,721, you set aside $20,000? Or $30,000? That's when the pot at 65 would be REALLY big money!

Comments

[Duane Gran]

This is a nice example of how compound interest works, but strategically speaking one might be wisest to fund a 529 plan for educational expenses for a newborn. Otherwise, the assets are in the child's name (a strike against financial aid and loan rates) at the age of 18 and it will likely be spent on college and its related expenses -- I'm talking about booze here.

[Lord]

One could leave it in your name and transfer it into an IRA over time once they begin to work.

[Rich Schmidt]

This is why my wife and I are investing in Roth IRAs. We hope to retire on one and leave the other to our grandkids someday. Right now, both our kids and grandkids are in the "pre-newborn" stage, so compounding ought to really pay off for them! :)

We hope to do this wisely & carefully, of course, so as not to ruin them!

[Duane Gran]

Another point to consider: The authors of the Millionaire Next Door make a compelling point, drawing on the experience of wealthy people, that there is an inverse relationship between the money you give children and the wealth they accumulate. In principle it sounds like a good thing to free your children from the challenge of making it on their own or to improve their odds, but in practice it is likely to enable them to be irresponsible with money.

[john wilson]

RE: How to make your child a millionaire.
I read the article where you need $6721.00
for a newborn to be a millionaire. I'm very curious where you would deposit this sum. Is it in a mutual fund where you would pay taxes yearly or or a tax deferred account or would it be a roth Ira. The article doesn't specify how to achieve this millionaire result.

[aks]

Guys,
This is all good, please can somebody explain where to get gauranteed 8% year after year for 65 years????????

[FMF]

AKS --

Guaranteed? No investments are guaranteed. But the stock market has averaged 10% annual return over the past 100 years or so.

[d snell]

The devaluation of any currency and the rate of inflation will make the value of the investment equall to if not less than its worth at the time of the deposit. This logic is supported by numerous worthy people. I do not believe this is the way to secure a childs future or wealth creation.

[money and kids]

it's a start. Atleast it would be a parent that is concerned about a child's future. Though for some families - coming up with that lump sum may be hard to do.

I would suggest a monthly amount set aside or invested for child and as child grows involve the child in picking investments and more.

It doesn't help if you don't teach the child how to wisely manage money and then one day they have a large sum of money that they waste in 2 years flat...

[April]

I recently opened a savings account for my 1 month old and deposited $25. I know it's not a lot but it's a start. When I have extra money I will put it her account. When I get my tax return I'm going to her a savings bond or a cd.