Post was updated on 08/16/22

Did you know… the odds of your child becoming a millionaire (or very close to it!) by the time they reach adulthood multiply significantly if you start them young?

I am not talking about winning the lottery, becoming a basketball player, or getting an inheritance from a long-lost uncle. 

I am talking about a powerful concept called Compound Interest.

Albert Einstein once referred to Compound Interest as the “eighth world wonder.” He was on to something! This mathematical formula can be quite magical when applied.  

Compound interest is the result of “interest on interest.” It is the result of reinvesting the interest paid by a principal sum of money over time instead of cashing it out.

For example, let’s say you open a High Yielding Online Savings Account account that you contribute to consistently. The account pays you interest on the money you deposit.

Instead of cashing out that money, you leave it alone to reinvest itself automatically and continue to grow and compound. 

Let’s say you do the same thing but with an investment account – the compounding becomes more powerful.

Allocating the money towards high-quality individual stocks, Exchange Traded Funds, and similar investment vehicles can generate mind-blowing returns over the years.

You can think of that investment account as a “little money machine” that grows and grows (AND GROWS!) over time.

rom a long lost uncle.

I am talking about a powerful (and very real) concept called Compound Interest.

It’s been said that Albert Einstein once referred to Compound Interest as the “eighth world wonder”. He was on to something! This mathematical formula can be quite magical when applied.  

Compound interest is the result of “interest on interest”. It is the result of reinvesting interest paid by a principal sum of money over time instead of cashing it out.

For example, let’s say open an online savings account that you contribute to consistently. The account pays you interest on the money you deposit.

Instead of cashing out that money, you decide to leave it alone to reinvest itself automatically and continue to grow and compound.  

The compounding becomes more powerful as time goes by when the money is being invested!

Allocating the money towards high quality individual stocks, Exchange Traded Funds and similar investment vehicles can generate mind-blowing returns as the years go by.

You can think of that investment account as a “little money machine” that grows and grows (AND GROWS!) over time.

You might be asking yourself – what does this all have to do with investing for the kid(s) in my life? Glad you asked! 

 Let’s look at the following examples.

Example #1 – The road to half a million:

Let’s say you open an investment account for a child in your life and invest in some stocks, Index Funds, and/or Exchange Traded Funds.

Now, let’s assume that the average rate of return for that account ends up being about 10% per year. It could be more or less depending on the swings of the market in any particular year. 
 

You decide to allocate $20 a month to the investment(s) in that account and you start when the child is 10 years old.

As your child becomes an adult, he or she continues the habit of saving just $20 per month. 

Assuming a retirement age of 65; the child would end up with almost half a million dollars by the time he or she reaches retirement age: $475,435.03 to be exact.
 

$475,435.03

Starting amount	$0.00
Years	55 years.
Additional contributions	$20.00 per month
Rate of return	10% compounded annually
The total amount you will have contributed	$13,200.00
Total interest	$462,235.03
Total at the end of the investment	$475,435.03

Source: Bankrate.com Compound Interest calculator

Notice how just $13,200 worth of contributions ballooned into $475K over the years.

And guess what – if you increase the contributions to $100 per month and invest in an account generating an 8% average annual rate of return, that money grows to OVER $1.062 Million by the time the child reaches the age of 65!
 

…speaking of millions…

Example #2 – The road to (more than) $1,000,000:

Let’s say the child is five years old, and you decide to allocate $2,500 during that year to an investment account that also pays a 10% rate of return. You allocate another $2,500 when the child turns 6 and don’t add any more money to the account after that.
 

You then leave the money alone to compound and grow over time. The child decides to cash out the account when he/she turns 65.

By that time, the account would have grown to over one million dollars – $1,419,714 to be exact. Your contribution of $5,000 allocated over the course of two years, grew to over a million – without any further action.
 

$1,419,714.95

Starting amount	$5,129.00
Years	59 years.
Additional contributions	$0.00 per month
Rate of return	10% compounded annually
The total amount you will have contributed	$5,129.00
Total interest	$1,414,585.95
Total at the end of the investment	$1,419,714.95

Source: Bankrate.com Compound Interest calculator

In this case, initial contributions of around 5K when the child was six, ballooned into more than $1.4 million over the years.

FYI:
 

You might have noticed that I am using a 10% rate of return metric in most of the examples. There is a reason for that.

Stock market returns started to get officially tracked back in the year 1926.

Studies have shown that since 1926 through recent times, the stock market as a whole has generated an average rate of return of 10% per year.

This means that in some years the stock market generated much more than 10% returns while in others it was less (ie:. during market downturns, etc.).

It is impossible to get those kinds of returns through savings alone. And thus, this is yet one of the many reasons why investing is so powerful. 

An individual can recreate an investment account with similar returns in a number of different ways.

One way is by building a portfolio of  strategically selected ETF (Exchanged Traded Funds) and high-quality individual stocks.

Friendly Reminder: Not All Investments are Created Equal

Remember that not all investments are profitable.

Before investing in anything, it is extremely important to do your research.

Whether you are investing for a child or for yourself, make sure the investments you select are of high quality and have the potential to continue growing and being profitable over time.

You can decide to hire someone to do this for you, OR you can 100% LEARN how to do this on your own – which I believe everyone can do.

Remember that no one will care more about your money than YOU. 

Remember that no one will care more about your money than YOU. 

I want to leave you with this: From time to time, you might hear about celebrities or the “rich and famous” brag about buying their children stocks or about how they’re investing for their kids.

I want you to know that investing it not only for the rich. Investing is accessible to EVERYONE and that includes YOU. 

Long gone are the days when someone needed millions of dollars and “Wall Street” connections to buy stock in major corporations.

In this day and age, we have access to investing platforms that are free to open, make it free to invest, and do not require any account minimums. 

It is easier and more accessible than EVER to invest and this just keeps getting better. Let’s all be grateful for that. The key here is to learn how to take action in order to make educated decisions.

Thank you for reading! Any comments or questions share in the comments.

With gratitude,

Mabel

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If you’re interested in learning how to invest and make educated investing decisions for you or the children in your life, check out these awesome resources:

The Ready, Set, Invest Workshop

The Beginner Investor Starter Pack (one of the bundles includes the workshop!)

Want to work with me one-on-one to help you set up an investment account for your child? Email me: Hello@girlsonthemoney.com