Make your kid rich for $1 a day
Reprinted courtesy of MarketWatch.com
Published: Aug. 13, 2014
To read the original article click here
Having a young child is expensive, and most parents can’t set aside much money toward the long-term future of their offspring.
But most young families (perhaps with help from grandma and grandpa) could find a way to save $1 a day. This extremely modest investment can yield amazing long-term results. Would you believe $4 million when your child reaches age 65?
Let me show you.
Obviously, you won’t make money like that putting the daily dollar in the bank. It’s got to be invested, and the results of such an investment are uncertain. But I will outline a scenario that can be followed by just about any parents (or grandparents).
Let’s assume we’re talking about a baby girl named Charlotte (an old-timey name that is reported to be one of the most popular choices for recently born girls). Let’s assume also that Charlotte’s parents save $365 a year for the first 18 years of her life.
I’ll also assume that Charlotte (this is in her self-interest, after all) gives her folks enough time to figure out that an investment in small-cap value stocks is probably the lowest-risk way to invest with an honest probability of earning 12% a year.
Even with as little as $365 to start, Charlotte’s parents can buy small positions in hundreds of small-cap value stocks through a low-cost ETF: Vanguard Russell 2000 Value Index . So let’s assume they do that, and by the time Charlotte is 18 they have invested $6,570 (18 times $365).
Compounding at 12% a year, their annual investments grow to be worth $20,348 when she’s 18. (Interestingly enough, the same result could be achieved if Charlotte’s grandparents or other family members made a one-time-only investment of $2,700 in her first few weeks of life.)
Let’s assume Charlotte, following her parents’ lead, has the good sense to keep this money invested in the small-cap value asset class for the rest of her life. Such a sensible young woman probably will be able to earn at least $5,500 a year starting at age 19. Why does that matter? Because it will give her the opportunity to contribute that much of her growing nest egg every year to a Roth IRA that will never be taxed. She won’t have to contribute her earnings, just the money her folks saved for her.
In her 19th through 23rd years, she doesn’t have to add another penny as she funds an IRA and watches her money grow. On her 24th birthday, her investments are worth $35,857. (This is probably considerably more than the majority of her contemporaries have, and for this she can thank her parents.)
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