Recently, I read a fairly intriguing book by Kevin McKinley, CFP, entitled, Make Your Kid a Millionaire: 11 Easy Ways Anyone Can Secure a Child’s Financial Future.
As the title suggests, the book’s overall message is that if you take some well-timed (early), pro-active steps, it is possible for people of many economic backgrounds to easily accumulate a large amount of wealth for their child by the time the child reaches retirement.
While there are many specific points covered in the book regarding trusts, taxes, rules of children earning income, etc, there are key two questions/themes that I wanted to explore as a result of reading this book. These are listed below:
- Question # 1 – What, when, why, and how should you start saving for your child’s financial future/retirement?
- Question # 2 – Having established a savings strategy, what is the best type of account/vehicle in which to save for your child?
Part 1 of this series will cover Question #1. Let’s get started!
Chapter 1 of McKinley’s book starts off with a brief ~100 word mentioning of a very potent savings strategy to set up a bright financial future for your child. And, I feel it is worthwhile to spend some more time discussing/elaborating on it. He states that setting aside “$1 every day will result in a millionaire kid later,” however, does not really get in to any additional specifics to execute this strategy.
Why Saving $1/Day For Your Child Can Create A Millionaire
In a nutshell, saving only a small amount of money each day can lead to a large amount later due to the concept of Time Value of Money (TVM), or as it’s often coined, the Miracle of Compounding Interest. Both of these terms have been discussed several times previously on my site.
This is the idea that saving (instead of spending) money today will accumulate to be worth more later in time because interest is earned each period, which then is eligible to earn future compounding interest on top of itself.
What is the Best Way to Save $1/Day For Your Child?
If you’ve been reading this blog for a while, you likely know what my take will be on the best way to save small amounts of money, consistently, over long periods of time.
That’s right – Automatic, pre-scheduled transfers from your checking account to your savings account/vehicle of choice (accounts will be discussed in-depth in part 2 of this series).
The reasoning behind using automatic transfers is 1) so you don’t forget to make the transfer each day/week/month and 2) to play a little psychological “trick” on your financial mind to cause you to miss the money less.
While each financial institution/account will do things slightly different, the ones I have experienced thus far will, unfortunately, not allow you do make 31 daily $1 transfers each month. Instead, many of them will have either $10 or $50 transfer minimums. This is not a show-stopper. You simply adjust the contribution frequently to match what $1 per day would equal and then proceed as planned, accounting for it in your zero-based budget.
When to Start Saving $1/Day For Your Child
Of course, the ideal answer here is “as soon as possible,” stemming from the fact that the earlier you can get compound interest working for you, you will have almost exponentially more money in the end. Unfortunately, I don’t think that is very realistic if you’re in a situation where you don’t plan on having kids for several years in to the future.
However, a good compromise to utilize going forward might be to start saving the $1/Day 9 months to 1 year before the child is born.
So, Just How Much Money Can $1/Day Translate To For Your Child’s Retirement Years?
To my fortunate surprise, saving just $1 per day translates to more money than I would have guessed before beginning this analysis.
For illustrative purposes, I put together the Google Docs worksheet at the following link for you all to download and play around with if desired – How Much Money Can $1 Per Day Lead To?
According to The Washing ton Post, the average age a person has their first child today is between the ages of 25-26 years old. If we assume that a parent starts stashing away $1 per day at the age of 25 (~1 year before the baby is born) and invests the money in a stock market mutual fund earning 10% per year, the following results are obtained:
- Saving $1 per day until your child finishes college (~ age 23) will yield >$1.9 million for your child when he or she reaches retirement age.
- If you wanted to be aggressive and save $1 per day PER PARENT ($2 per day) for your child in the same fashion, this would translate to >$3.9 million.
Intriguingly, and also demonstrating that compound interest over long time periods is the key factor in savings growth here is the observation that if you were to continue saving $1 per day for your child until they are AGE 65 (the parent is age 91), it results in a nest egg of $2.1 million, only 11% more than if you stopped contributing 40 YEARS EARLIER when the child was 23 years old. Crazy, eh?!
Conclusions / Looking Ahead to Savings Vehicles (Part 2)
Clearly, just a little bit of foresight/financial knowledge and only several minutes of your time to execute the strategy of saving just $1 per day for your child can lead to a significant amounts of money for his or her future due to the workings of 65 years of compounding interest.
Of course, these calculations do not take inflation in to consideration, meaning that being a millionaire when your child retires may not mean the same as it does now. In addition, if you want your child to go to a fancy private university that costs $40k per year, saving just $1 per day is not going to be sufficient, as you’d only have around $40k saved up by the time your child goes to college.
We’ll take this in to consideration in Part 2 of this series when we examine which is the most appropriate vehicle/account to save money in when trying to make your child a millionaire. Stay tuned!
How about you all? What sort of money saving strategies, if any, do you employ for your children?
Share your experiences by commenting below!
***Photo courtesy of http://www.flickr.com/photos/85583346@N00/167558529/sizes/