I confess that coming up with a financial resolution that was worth sharing with the world wasn't easy. Should I devote money toward a down payment on a house? Should I maximize my 401(k) contributions? Should I simply put extra money into a mutual fund every month? Decisions, decisions -- and it's already three weeks into the New Year, so I'd better hurry up!
While all of the above are great options, and I should probably commit to most of them like, erm, yesterday, I've settled on something that could end up making a huge difference someday: I'm going to regularly contribute to an investment account for my son.
The obvious financial benefits
My son will be turning two this February, and all signs indicate that he has a great life ahead of him. He was born in the United States of America in the 21st Century. He lives in a happy and loving home. And The Many Adventures of Winnie the Pooh is available for streaming on Netflix whenever he wants (to think I had to put in a VHS tape to watch Pooh climb the honey tree)!
In any case, he has 16 sure-to-be-interesting years before he even goes off to (gulp) college. And rather than fretting over the astronomical cost of college and how much higher it could be be in the year 2032, I'm focusing on the fact that he has 16 years of compounding to grow his wealth exponentially before he leaves the nest.
Even if he averages annual returns of just 8% (less than the average for the stock market over the last 100 years), the math, is just plain awesome:
|
Monthly Contribution |
Value at Age 18 |
|---|---|
|
$10 |
$3,795 |
|
$20 |
$7,589 |
|
$50 |
$18,974 |
|
$100 |
$37,947 |
Source: Author's calculations.
That's right, ladies and gentlemen: For the price of what many of us spend on a cup of coffee per week or grabbing a beer with the guys your child too can start life off with a nice chunk of change.
What happens if my son keeps the ball rolling? What if he keeps a hypothetical, say, $18,000 in an S&P 500 Index Fund averaging 8%, untouched and with no additional contributions, until he's 30, 45, or even 65?
|
Age |
Final Value |
|---|---|
|
30 |
$45,327 |
|
45 |
$143,785 |
|
65 |
$670,176 |
Source: Author's calculations.
Ah, the magic of compounding. That's right folks, by setting aside just $50 a month, my son will be able to put a down payment on a home, take his dear old dad on a trip around the world, or pay off all those school loans he's probably going to have -- by the time he's 30. Think about what you could have done with an extra $45,000 on your 30th birthday.
Even better, he could just let the money sit there until he's 65 and have a not-to-be-sneezed-at $670,000 in the bank.
The hidden benefits
There are other benefits to my financial new year's resolution -- namely, engendering a lifelong love of investing and the power of compounding in this little person who has my hair. The Motley Fool's co-founders, Tom and David Gardner, happily tell the tale of how they became interested in investing. Their father would take them to the local grocery store and talk to them about the publicly traded companies that made their favorite products on the store shelves. They were hooked, and I think it's safe to say The Motley Fool wouldn't be around today had the Gardners' dad not taken them to the local Safeway all those years ago.
Resolutionary final thoughts
Reflecting on this resolution, I find myself all the more convinced that this is a great idea. My son will benefit from a lifetime of compounding if he plays his cards right. Not only that, but he will (fingers crossed) take a genuine interest in this thing called the "stock market" and the companies in which he can be a part-owner. Given his life experiences and interests so far, I'll probably look into buying him shares in Walt Disney (NYSE: DIS), Hasbro (NASDAQ: HAS), and Mattel (NASDAQ: MAT) to start. Too bad The Lego Group isn't publicly traded...
