Make Your Kid a Millionaire the Old Fashioned Way - Establish a Long-term Savings Program

Most people know that Social Security is in trouble, pension plans are a thing of the past, the cost of educating your kids is sky high, and people don't chose to or can't save much money. So how are your children ever going to accumulate enough money to have a financially secure retirement?

Here's one way to help solve the problem. After your child is born, start immediately to invest $100 each month, and keep the investment program going for 65 years. That's right, do it for the next 65 years. Assuming you can get a six percent rate of return, the balance will be $958,494.00, just shy of a million dollars.

If you can't afford $100 each month, then put in a smaller amount. But for compound interest to work its magic of earning interest on interest, you need to begin the program at the earliest possible age, preferably when your child is a baby.

But if your children are older, you can still do the savings program. An account following this program started for a 15-year old, would be worth $378,719.11 at age 65.

As the kids get older, the savings program can be a family project with them contributing some of their money to the account. It's a great way to get kids thinking about saving money, not just spending it.

Getting the six percent return on your investments is straight forward. Because of the very long period, you can safely invest in stocks. As long as the U.S. economy does not enter a Dark Age, stocks should easily produce a six percent return, even with their short-term price fluctuations.

Simply select an index fund or exchange-traded fund (ETF) that tracks the largest U.S. companies. ETFs can be purchased from any full-service or discount broker; buy index funds directly from selected mutual fund companies. Fidelity Investments offers the Spartan 500 Index Fund - Investor Class (FSMKX) and Vanguard offers the Vanguard 500 Index Fund Investor Shares (VFINX), Both index funds track the S&P 500, a collection of the five hundred largest U.S. companies. A sound ETF is the iShares S&P 500 Index (IVV), which tracks the S&P 500.

These three funds charge very low annual fees. Important note: avoid most managed mutual funds, particularly ones that levy sales charges and high annual fees. Any fee reduces your total return, and high fees can cut returns by thirty to forty percent over long periods.

Also, be sure to select the dividend reinvestment option when you buy any of these funds. Reinvested dividends will add one or two percentage points to your total return over the long term.

Of course, the mechanics of the making the regular monthly investments might be little tricky since you might not be alive for the duration. But that's what lawyers, accountants and financial planners are for - to help us figure out how to do the right thing.

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Posted February 9, 2008.