All Children Aboard The Wealth Train
Having received a few queries over the past few weeks regarding investing for children, we thought to make such the topic of this week’s Money in Minutes.
And spoiler alert… our Wages to Wealth program has recommendations in this space. So no excuses!
There's a popular Chinese proverb that says: “The best time to plant a tree was 20 years ago. The second best time is now.” None of us can go back 20 years, but what about our children. We both have young children, and we are both fortunate to be in positions where we can invest for our children, just like we wish our parents had done for us. What about you? Do you have children who you can start to invest on behalf of?
Those of you with some vintage may have heard of a financial planner and author by the name of Noel Whittaker. In one of Noels books, he had a chapter titled ''The Fairy Godmother and the Magic Train''. The purpose was to illustrate to readers the power of compound interest, and it told a story about a good fairy who visits all new parents to tell them about a ''train'' that could take their young children to wealth.
The fare to take that train journey was just $2.83 a day (approx. $1000 a year) assuming parents started investing for their children immediately. Believe it or not, but by end of the trains journey each child could have more than $3 million by age 65. It’s important to note that the figures used were based on the assumption that the money is invested in quality index funds (like those we recommend in the Wages to Wealth program), and that these funds earn an average of 9 per cent a year (we prefer to assume 8% just so we’re not getting too ahead of ourselves) with any income received reinvested back into the fund.
As mentioned earlier, we wish our parents had been able to stump up $2.83 a day from the day we were born. To be honest, had our parents known what they didn’t know, we are confident they would have found the money to invest, as everything they did was for us. The difference is that they were not well educated when it came to money matters.
We harp on a lot about starting to invest as soon as you can. In this wealth train scenario, each year that passes before you start investing, means that you will need to pay more for a ticket on the wealth train. If you don’t, your children will not get to travel as far on this journey, as there is less time for the money to compound (i.e. grow).
In Noel’s book he uses an example, where if you started the program when your child was born, the "train" could be worth $6000 at age five, $16,000 at age 10, $62,000 at age 21, and $152,000 at age 30. These figures also represent the ''boarding'' cost for anybody who wanted to join the train journey later.
The story does far more than demonstrate the magic of compound interest – it also shows the massive cost of delay. Suppose you were to put off investing that $2.83 a day until your children were age 21. At age 21, to offer your children the same journey that builds over $3 million in wealth, you will need to part with approximately $20 per day to buy a ticket on the same wealth train.
If you have children, we are going to assume something like this is of interest to you. If your children are young, perhaps all you need to do is find an extra $3 per day. If you have older children, you may need closer to $20. Either way we hope this is achievable for you.
Don’t forget, the Wages to Wealth program has investment recommendations within Module 6 so as you can go ahead and take action on investing for your children.
Good luck! And remember, if you get stuck, we’re only an email away.
Cheers,
Dan and Dave
