With a son in college and a daughter about to graduate from high school, the topic of saving money has been on my mind lately. Last week we talked about the one thing millennials can do to achieve financial security. It’s as easy as putting a small amount of money aside regularly, whether weekly or monthly. Today we’re talking about how millennials can save money for their kids.
This is “mission critical.” I have been advising my kids to be aggressive savers, as the financial future for them, their kids, and our country looks murky. Neither of my kids are close to starting families, but we have discussed why it’s important to put something aside for their children when they are born and/or small: Starting early let’s you take advantage of compounded interest.
How millennials can save money – for their kids
If my son and daughter deposit $100 per month for 20 years, that money can earn around 7% (average return on the SPX 500 over time, not adjusted for inflation). This will yield about $52,400, with more interest earned over time than what is actually being deposited ($24,000).
Earning power is only likely to get better as my children’s careers flourish and they save even more money for their kids. The pie will grow even bigger. Imagine having a nice pot of cash when it’s time for a child to start college?
Stretch that savings out to 60 years (from say birth until near retirement age) and that same $100 monthly contribution at a 7% earnings rate blows up to $1.1 million. Total interest earned is over $1 million, with deposits at “only” $72,000. This could be one of several retirement accounts. Who needs to rely on social security when you can create wealth with a small action?
(I do realize that what I consider to be a small monthly deposit might be enormous for some people. However, I want to emphasize the power of compounding interest. No matter how small you start, it has a great impact.)
Pay yourself first
Now, you might wonder: Can I consistently put aside $100 every month for 60 years? That seems like a tough job, but if you never “see it” to begin with, it might not be as painful. Financial planners often tell clients to “pay themselves first.” Set up an automatic deposit in an easy SPX 500 fund like Vanguard (when I say easy, I mean it’s has the lowest expense ratio).
Saving early, passing along the lesson of saving to your children, and then handing off the account when they are ready is one of the greatest legacies you can leave behind.
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