I wish more people knew that the odds of your child, godchild, [insert little person you love here] 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 inheriting a fortune from a long-lost relative.
I am talking about a powerful concept called Compound Interest.
Albert Einstein once referred to Compound Interest as the “eighth wonder of the world.” This mathematical formula can be quite magical when applied.
Compounding is what happens when you invest your money intelligently and strategically in high-quality investments and then sit back and let time do the rest.
Let’s look at some real-life examples using a couple of different (and realistic) scenarios.
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 the average rate of return for that account is about 10% per year (a standard, conservative rate). It could be more or less, depending on market swings in any given year.
You decide to allocate $25 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 saving just $25 per month (something that can be set up automatically).
Assuming a retirement age of 65, the child would end up with OVER half a million dollars by the time he or she reaches retirement age: $568,903.91 to be exact:
Source: Bankrate Compound Interest Calculator
This is what I believe is mindblowing: Only $16,525 in contributions over the years ballooned to over half a million dollars. A beautiful example of how compounding works!
Example #2: The passive road to millions
Let’s say the child is 5 years old, and by then you have managed to save about $5,000 for them. If you invest that total towards a single ETF or Index Fund with an average rate of return of 10% per year, and never add another penny to the account, here is how much your child will have accumulated by the age of 65:
Source: Bankrate Compound Interest Calculator
In this case, your initial contribution of only $5,000 ballooned to over $1 million in 60 years without having to move a finger beyond setting up the initial allocation.
$1,517,408.20 to be exact.
Without having to lift a finger.
*I’d also recommend just checking the account at sporadic times over the decades (maybe every quarter or every 6 months) so that the broker knows you’re still alive and well ;).
I don’t know about you, but this is absolutely incredible and is also accessible to EVERYONE.
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.
Friendly Reminder: Not All Investments are Created Equal
Remember that not all investments are profitable. If the stocks and funds you select are of poor quality, compounding won’t do anything. On the contrary, it could be detrimental to your wealth-creation goals.
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 high-quality and have the potential to continue growing and remain profitable over time.
You are 100% capable of doing this on your own and setting up that young person in your life for a secure financial future.
Remember that no one will care more about your money than YOU.
From time to time, you might hear celebrities or the “rich and famous” brag about buying their children stocks or investing for their kids.
I want you to know that investing is not only for the rich. Investing is accessible to EVERYONE, including YOU and your loved ones.
Long gone are the days when someone needed millions of dollars and “Wall Street” connections to buy stock in major corporations.
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 to make profitable decisions.
Where do we get a 10% ROI?!
This was precisely a frequently asked question I received regarding this post (mostly from people on my Facebook page). I realized I didn’t really specify, so here we go:
Historical stock market data since 1926 confirms that the stock market (most popularly known as the S&P 500) has generated an average rate of return of 10% per year for the past (almost) 100 years. The 10% ROI includes dividends being reinvested.
While past performance is not a guarantee of future results, the track record is a healthy and reasonable indicator of what we can expect.
Please let me know if there are any specific questions about this!
What about stocks? How do I gift investments?
I talk about that and so much more in this report.
Thank you for reading!
Cheers to health and profits,
Mabel
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