Help Your Baby Become A Millionaire

... before he turns 65. It is really not that hard. Compound Interest in savings and reinvestment of dividends will turn your two year old into a millionaire, if you can teach yourself and your child to save and invest, and to have the discipline needed to not touch it! Here is the plan in action, and then I will explain it all in a second.

For two years (say from birth to two?) set aside $20 per week for your child. By the time they are two- if you do leave the money alone - you will have saved up the necessary nest egg, all you will ever have to cough up to make your kid rich. Now you will get them an investment account, in which you can invest your child's funds- again don't worry yet I will discuss the details of that later.

The Rule of 72 and 10% Return on Investment

To understand how this will work you need to understand what compound interest is. In the years between 1900 and 2000 the worldwide return on stocks, if they were reinvested was 9.2%. In the USA, it was 10.1%. At a 10.1% return on your money, it takes about 7 years to double your money, when you invest and accumulate. Let's ignore taxes for a second. If your 2 year old child invests in an average portfolio of stocks (you will have to do it for him, at first!) by the time he is nine it will, if left alone be about $4000. Seven years later, at age 16, he now has a more sizable $8000 dollars. This is not a college fund however, and he is not going to touch this to buy a car or ANYTHING ELSE! By the time the next 7 years rolls around, he is 23, and his account stands at $16,000. $32,000 at 30 years old, and 64,000 at 37. When he hits middle age at 44 it will be worth 128,000, and at 51 he will have stashed away $256,000. The half million mark is reached before he is 58, and by the time he is 65 he will have well over a million dollars.

Now of course inflation will make a million dollars worth a good bit less than it is in today's dollars, and you would not necessarily make a 10% rate of return on your stocks. But you do not have to be brilliant to do better than 10%. Historically the large cap stocks have done in the 10% range but small caps over a 70 year period did 12.7%. The easist way would be to buy a mutual fund that is a basket of 100's or 1000's of stocks. Go with a reputable low cost broker, and buy one for small cap stocks, or just one that consists of Dow Jones stocks. Never sell.

The rule of 72 is a simple way to calculate how soon you will double you money, given a certain rate of return. If you divide the rate of return into 72 the number you get will give you the number of years it takes to double your money. With that calculation it takes about 8 years to double up if you are earning 9% (9 into 72=8) and if you earn 12% on your money you will double your investment every 6 years. In that scenario, if you invested your kids money in small cap stocks at  closer to 12% he could be a millionaire at 55! Of course small caps are riskier, on the average, so you might just lose the nest egg. To get a no-load (low cost to yo) mutual fund, look at Vanguard, T-Rowe Price, or American Century.

You could set your child's account up in your name, but it is better to do it in your child's name, with you as a guardian or custodian.As a guardian you have a tighter grip on the money but you pay taxes on it at your rate, and the tax benefits are much better with a custodian account. Under that age of 14, the first $650 of earnings is not taxed for kids. After 14 years old, the child gets the first $650 free and then pays 15% after that. Your tax bracket would be higher. Going back to our above example, by the time your child is 9, he does not have to give any of the approximately $400 earnings that year. By 16 he would be earning more like $800 but only owe 15% of 150 of it, or about $22 in taxes.

However, by 16 your child may well be working, and the smart thing to do would be to put up to $2000 of his income into an IRA (regular or Roth). You wont be able to do that much sooner, unless your child is a child actor or in some other way earning money at the younger ages.

What's the Hitch?

Teaching your kids about money, and how to Make a million dollars, would be easier if they were mature and responsible adults. You as a parent only have a few short years to teach your kids that they need a savings plan, and how to prioritize (budget) their spending. The most likely way this method will come to an unhappy end if if the child (or parent) does not treat this as a long term savings plan, and instead takes money out when the next crisis hits. Money and kids can be a volatile mixture. Hopefully they will learn by your example, and when they get old enough to make their own financial decisions, they will have learned by watching how you did it, and continue the good habits into their adult years.

Photo Credits:    Money borman818

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