Parents want what’s best for their kids and to set them up financially, but many think it’s easier said than done. You may be surprised to learn that helping your child become financially stable may not be as hard as you think. By investing wisely, you can help your child become a millionaire over time. Here’s what you need to know.
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What Is Compound Interest?
The biggest advantage of investing early in life is that your interest will begin to compound. The longer your interest compounds, the more money you’ll accumulate. Put simply, compound interest occurs when you earn money on your initial investment, and those earnings then begin to earn money.
For example, if you invest $100 in an account that gains 5% interest every year, you will begin earning at a faster rate the longer you leave your money on. After your first year, you’ll earn $5 on your $100, totalling $105. The second year, you’ll earn 5% interest on this $105. At the end of year two, you’ll have $110.25. After a third year, you’ll have $115.76.
With this strategy, it’s possible to help your child reach millionaire status. Investing in index funds, a collection of investments that track a certain sector of the market or the entire stock market, is an excellent way to get a consistent return on your investments. Historically, the S&P 500 has provided a return of around 10% per year. However, with the average rate of inflation near 3%, the returns are closer to 7%. With these numbers, it’s possible to calculate how much you’d need to invest to make your child a millionaire by certain ages.
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A Millionaire by 30
To help your child become a millionaire by the age of 30, you’ll need to put in large deposits each month. At a 7% annual rate of return, you can reach $1,000,906.49 by contributing $883 each month. If you’re able to find an investment that consistently gives a 10% rate of return each year, you’ll only need to invest $507 per month to reach $1,000,781.63 in the same amount of time.
If you don’t want to constantly invest money, it’s also possible to put one large contribution in at the beginning and just wait. If you’re earning 7% annually, you’ll need to invest $131,500 on the day they were born to get $1,001,011.54 in 30 years. With a 10% return, you’ll need to put $57,500 in it to reach $1,003,340.63 by the time your child reaches 30.
A Millionaire by 40
An extra 10 years allows you to invest less per month, making it more manageable. At 7%, you’ll need to invest $418 per month to reach $1,001,369.72 in 40 years. With a 10% annual return, you’ll only need to invest $189 per month to reach $1,003,799.92 in the same time frame.
If you want to invest one amount on the day the child is born, you’ll need to contribute $67,000 right away to reach $1,003,288.68 at 7%, and $22,100 with a 10% return to reach $1,000,229.55 by the time they turn 40.
A Millionaire by 50
Having 50 years for interest to compound makes investments much easier. If you invest $205 per month for 50 years at 7% interest, you’ll get to $1,000,061.17. At 10%, you’ll need to invest $72 each month to reach $1,005,616.97 in 50 years.
You’ll need to invest a lump sum of $34,000 to compound over 50 years at 7% to get to $1,001,538.85. With a 10% return, you’ll need to start with $8,600 to reach a total of $1,009,561.33 over 50 years.
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This article originally appeared on GOBankingRates.com: How Much To Invest To Make Your Kid a Millionaire in 30, 40 or 50 Years
