This page describes a simple plan to generate $150,000 for your child by the time they turn 21.
What you need to supply is:
- Time: About 20 years is great, more or less time can work if you adjust the plan. The plan works very well if you start when your child is born.
- Saving. You need to save $8 each work-day. You get weekends off so thats $40 a week. This is the tough bit. Most people can spare $8/day but very few can save it over the long term.
It works like this:
- You save $8 a day, $40 a week, or around $2000 a year.
- You invest this in a managed share fund that is indexed to the share market. Based on historical performance this will mean an average of around 10% appreciation every year. The share market has many ups and downs, but over the long term, 10% is about right if you reinvest dividends. You are interested in the long term, so all the swings will average out. If you don’t like the share market you could choose some other investment with similar returns like a property fund.
- You increase your savings each year based on inflation. For example if the average inflation is 3%, you increase your savings from $40/week in the first year to $41.20 a week in the second year.
- You keep this up for 20 years. Your saving and the magic of compound interest means your child now has over $150,000 at age 21. Even with inflation, that still a lot of money, just when they need it the most. Invested wisely, it could make a big difference to your childs life. The cool thing is that unlike you and me kids have a pretty long time horizon, which lets compound interest go to work with a vengeance.
Here is an Excel spreadsheet that shows you how it all works. Here is the same table in PDF form. I wanted to put the table directly in this post but couldn’t work out a nice way of getting a formatted spreadsheet table into WordPress.
BTW I find Excel (or the spreadsheet of your choice) really cool for basic financial modelling like this. It’s a lot of fun to experiment with. If you think part of my model is wrong, try entering your own parameters and see what develops. What is the effect of 5% inflation, or putting $80/week into the plan?
Does it work? I think so. I started it about 8 years ago (when my first son was born and my daughter was 2) and while not exactly matching the model results both of them could now buy a (small) new car outright. My 8 year old probably has more savings than many 28 year olds. Still, my kids are a few years behind the curves in the spreadsheet which makes me wish I had put in more money earlier. Doh!
On problem is that I am struggling to put the $40/week in. I like to do it in lump sums of a couple of $k a year and my wife often objects when I suggest it. It’s kind of hard to visualise the compounded effect $2k can have over 20 years for many people, especially if you are focussed on paying down a mortgage or have bills to pay. However I can’t think of a better use for my money that my kids future. Can you?
In Australia the government is giving $4,000 to the parents of every new baby born. So when our 3rd child was born last year I invested this baby bonus it in my newborn sons name. I am not sure what most parents do with their baby bonus however I suspect a lot of it ends up being used for flat screen TVs. Now my 11 month old son needs to file a tax return as he made a few hundred dollars in dividends! As my daughter says “he can’t even talk and he is making money”!
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