Ten steps to financial freedom: Make your child a millionaire
Make Your Child A Millionaire
One of the best things you can do for your kids is to show them how money works: how to make money, how to manage it, and how to make it work for them. The best way to do this is to invest for them while they are young, slowly building a solid financial foundation for them to stand on. A lot of people are quick to dismiss this as indulgent behaviour guaranteed to turn out spoilt-rotten sponges, but we urge you to think a little more broadly.
Making your child a millionaire is about ensuring your child is able to enter adulthood without serious financial worries, and with the advantages money can buy, and the kind of financial sense - instilled in them by you - that ensures a healthy relationship with their pennies and pounds for a long time to come. Granted, with inflation and without guaranteed rates of growth, you may not reach a million pounds by the time your children become adults. No matter - by then, they'll be finance-savvy savers and investors themselves, building on the foundation you began.
How to invest for your children
Stock market, stock market, stock market! The long-term return on investment in the UK stock market has been around 11% per annum since 1918. Take a look at what might happen if you invest just £25 each month on your child's behalf, and what might happen if you leave it up to them to start on their own:
|Child's age||Invest £25pm until 21 then stop||Start investing £100pm from age 21|
If you put £25 a month into a tracker fund until your child's twenty-first, and the historical return had been achieved, it would then be worth about £24,064. If you hand the fund over and it continues to accrue compound interest, then by the time they reach 60, a total outlay of £6,300 would be worth around £1.4m. However, if you invest £100 a month from age 21 to 60, you'd only end up with half this amount, despite having invested considerably more.
For simplicity, we've ignored the impact of tax, charges and inflation here, all of which would take a hefty chunk from these sums. But, even allowing for these, the basic message remains the same and that is the earlier you invest, the easier it is to build a significant pot of wealth.
To help parents prepare for their children's futures, Child Trust Funds were launched for babies born after 31 August 2002. The Government added money at birth and at age 7 and anyone could add a further £1,200 a year and all this money is completely protected from the taxman. Unfortunately, this scheme is now being phased out and won't apply to children born after December 2010. Existing Child Trust Funds will continue until the child turns 18.
The easiest way to teach your children about finance is to get them involved. Investing money on their behalf is a great place to start, but that's just the beginning. Teach them how money invested sensibly will grow, and how, when the growth is added in, that will also start to grow. Show them how to save by opening a savings account for them, and get them to pay the money in themselves. You could even introduce the idea of buying shares in individual companies.Free special reports from The Motley Fool: