Last week, we talked about how the millennials can get a jump on securing their financial future. It can be as easy as putting a small amount of money aside regularly each week and month. Today's article talks about being proactive and saving for the next generation. It is mission-critical to take an aggressive role to get them off to a good start, as the financial future for them and our country looks murky.
With the financial constraints that may be encountered down the road, I have impressed upon my children to start saving for their kids even earlier. While they are not close to starting their families, I have reminded them of late to put something aside for their children when they are born and/or small, to start early as the effects of compounding are enormous. As an example, depositing $100 a month for 20 straight years at 7% (average return on the SPX 500 over time, not adjusted for inflation) yields about $52,400, with more interest earned over that time than deposits.
Earning power is likely to get better over a career of working; potentially, savers could step up and put in more money and let the pie grow even bigger. For those 20 years requires just a total deposit of $24,000. Imagine having that nice pot of cash in an account when it's time for a child to start college.
Stretch that out to 60 years (from, say birth, until near retirement age) and that same $100 a month contribution at a 7% earnings rate blows up to $1.1 million. Total interest earned is over $1 million, deposits are $72,000. This could be one of several retirement accounts over a working career. Who needs to rely on social security and Medicare, when the wealth has been created by these small actions? (note: small for some, of course; I realize others have difficulty achieving these goals, but with compounding even starting small has a great impact).
Now, can someone consistently put in $100 a month for 60 years? That seems like a tough job, but if you never "see it" to begin with, then it might not be as painful. Financial planners often tell clients to "pay themselves first": perhaps just depositing $100 a month in an easy SPX 500 fund like Vanguard (least expensive expense ratio) would be a start. This is great advice, and automatic debits from a bank account or paycheck are the ideal way to do it.
Starting off early, showing how the account grows to your children then handing it off when they are ready to do the same is the best legacy one can offer their kids. It means getting ahead of the game and preparing for an uncertain and volatile future.