How to give your kids $2 million: US

I wish I had known the power of compounding at a younger age. I want to better my parents in this life and I want my kids to better me. I opened up a UMTA  (investment) account at Vanguard for both of my kids, set them up with an initial $3000 each and have been giving them $100 each per month.

Let’s see how much they’ll be receiving on their 18th birthday with a 7.5% average return. I used 7.5% as this is the average 30 year return adjusted for inflation between 1980 and 2009:

Found here:

9-26-2017 1-51-58 PM

Year Start Invested Return End
1 $3,000 $1,200 $225 $4,425
2 $4,425 $1,200 $332 $5,957
3 $5,957 $1,200 $447 $7,604
4 $7,604 $1,200 $570 $9,374
5 $9,374 $1,200 $703 $11,277
6 $11,277 $1,200 $846 $13,323
7 $13,323 $1,200 $999 $15,522
8 $15,522 $1,200 $1,164 $17,886
9 $17,886 $1,200 $1,341 $20,428
10 $20,428 $1,200 $1,532 $23,160
11 $23,160 $1,200 $1,737 $26,097
12 $26,097 $1,200 $1,957 $29,254
13 $29,254 $1,200 $2,194 $32,648
14 $32,648 $1,200 $2,449 $36,296
15 $36,296 $1,200 $2,722 $40,219
16 $40,219 $1,200 $3,016 $44,435
17 $44,435 $1,200 $3,333 $48,968
18 $48,968 $1,200 $3,673 $53,840

Yes, that’s right…$53,840. Of course I don’t plan on just handing this over without a discussion. Once I feel they can calculate and understand the power of compounding, I’ll spend some time with them to show them this. They’ll be further ahead at 18 than I was at 30. Hopefully they’ll continue to work and invest then they can be F.I early in life.

If they continue to invest just $100 a month until 65, they will accumulate $2 million. I think it’s fairly safe to conclude they will be set for retirement. The power of compounding is amazing the more time you give it, so start early and track it.

If you don’t have the initial $3000, open a betterment account which has no minimum investment amount. This has a slightly higher expense ratio so when you have your first $3000 (after 2.5 years) transfer this to Vangaurd/Schwab/Fidelity. I have my kids invested in the S&P 500 Index fund, it has a tiny fee around 0.04%. If Warren Buffet can recommend this fund to his wife then this is good enough for my kids.

Here is a chart for the full 65 years:

Year Start Invested Return End
19 $53,840 $1,200 $4,038 $59,078
20 $59,078 $1,200 $4,431 $64,709
21 $64,709 $1,200 $4,853 $70,762
22 $70,762 $1,200 $5,307 $77,270
23 $77,270 $1,200 $5,795 $84,265
24 $84,265 $1,200 $6,320 $91,785
25 $91,785 $1,200 $6,884 $99,868
26 $99,868 $1,200 $7,490 $108,559
27 $108,559 $1,200 $8,142 $117,900
28 $117,900 $1,200 $8,843 $127,943
29 $127,943 $1,200 $9,596 $138,739
30 $138,739 $1,200 $10,405 $150,344
31 $150,344 $1,200 $11,276 $162,820
32 $162,820 $1,200 $12,211 $176,231
33 $176,231 $1,200 $13,217 $190,649
34 $190,649 $1,200 $14,299 $206,147
35 $206,147 $1,200 $15,461 $222,809
36 $222,809 $1,200 $16,711 $240,719
37 $240,719 $1,200 $18,054 $259,973
38 $259,973 $1,200 $19,498 $280,671
39 $280,671 $1,200 $21,050 $302,921
40 $302,921 $1,200 $22,719 $326,841
41 $326,841 $1,200 $24,513 $352,554
42 $352,554 $1,200 $26,442 $380,195
43 $380,195 $1,200 $28,515 $409,910
44 $409,910 $1,200 $30,743 $441,853
45 $441,853 $1,200 $33,139 $476,192
46 $476,192 $1,200 $35,714 $513,106
47 $513,106 $1,200 $38,483 $552,789
48 $552,789 $1,200 $41,459 $595,449
49 $595,449 $1,200 $44,659 $641,307
50 $641,307 $1,200 $48,098 $690,605
51 $690,605 $1,200 $51,795 $743,601
52 $743,601 $1,200 $55,770 $800,571
53 $800,571 $1,200 $60,043 $861,813
54 $861,813 $1,200 $64,636 $927,649
55 $927,649 $1,200 $69,574 $998,423
56 $998,423 $1,200 $74,882 $1,074,505
57 $1,074,505 $1,200 $80,588 $1,156,293
58 $1,156,293 $1,200 $86,722 $1,244,215
59 $1,244,215 $1,200 $93,316 $1,338,731
60 $1,338,731 $1,200 $100,405 $1,440,336
61 $1,440,336 $1,200 $108,025 $1,549,561
62 $1,549,561 $1,200 $116,217 $1,666,978
63 $1,666,978 $1,200 $125,023 $1,793,201
64 $1,793,201 $1,200 $134,490 $1,928,891
65 $1,928,891 $1,200 $144,667 $2,074,758

Just look at those last fifteen years. Time is so powerful in the market. The one thing I haven’t done is adjust the contributions, I hope my kids will increase their contributions once they start working.

What are other readers doing for their children? Click here to leave a comment

Never Time the Stock Market

“Don’t trust anybody who thinks they know more than the markets. Instead, trust the markets themselves. Invest whenever you have available funds, stay invested, and, most important, ignore the dire warnings of the so-called experts” – Larry Swedroe

homer

Each year we have access to the annual Investor Behavior Study where they compare Investor performances to the S&P performance (the main benchmark). In 2016, the average Equity fund investor returned 7.26% vs the S&P 500 Index 11.96%. Over a 30 year time frame the average Equity investor returned just 3.96% compared to the S&P 10.16%. That’s a huge difference.

Investors need to remember one simple rule : SET IT AND FORGET IT. It’s natural human behavior to freak out when the market declines, automatically fear losing everything. Historically it has always recovered. We lose when we freak out and sell low. For my five year plan to work, I actually need a market correction in the next couple of years, this will give me an opportunity to buy more at a lower price. When the market recovers, my portfolio will be worth even more.

Over the past two years we’ve had BREXIT, TRUMP,  CHINA and now North Korea. The market stumbled and then quickly recovered. I made a mistake last year, freaked out before the election and sold my mutual funds. I was laughing the night of the election when the futures market was down 5%. The following days trading session ended up unchanged. I bought back two weeks later, losing a potential 2% growth. I learnt at that time to NEVER time the market.

Here is the S&P 500 chart since 1993, this is the chart through the dot com bubble, banking crisis, 9/11, Afghanistan, Iraq, Brexit, Trump etc. Whatever is coming in the future, do not worry and see it as an opportunity to buy more at a lower price.

s&p

Today we are trading at the all time highs in the 2500 region. The sooner a market correction happens the better, during my accumulation phase I would much rather be purchasing mutual fund shares at a lower price. Invest for the long term and you’ll be fine.

Warren Buffet recently said that when he passes away, he would like his wife to invest in the S&P 500 index. Well, if this is good enough for Mrs Buffet, it’s good enough for me and my kids. The US economy is already globally diversified and I do not like owning single stocks (look at Enron and Lehman), I would rather own all 500 companies in a low cost Index Fund. Vanguard charges 0.04% and I invest in this each month.

Here is a link to the Vanguard fund I have selected for my kids