There are lots of articles explaining how you can become a millionaire... if you just invest a significant sum regularly for decades. And if you're starting in your 40s or 50s, then you have even less time for compounded growth to work its magic, so you'll need to be socking away many thousands annually in order to get there. It's not so with your children, though. A one-time investment of just $9,000 can make them a millionaire.
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When it comes to growing great sums of money through savvy investments, a key factor is time, and though we may have good jobs with generous salaries, we're still limited by time in how much we can amass. If you hope to retire at 65 and you're just starting to think of saving for retirement now, when you're 45, you'll only have 20 years until you stop working. (Your nest egg can still grow throughout retirement, but you'll be putting much less -- or nothing -- into it, and you will be drawing it down, too.)
It's an irony of modern life that when we're young and with lots of time ahead of us, we tend to not have much money, and by the time we have significant money, we have much less time. There's a way to skirt around this, though, by skipping a generation -- or two.
A few dollars can become a lot, given time. (Photo: Jericho, via Wikimedia Commons)
Eye-popping examplesTake a spin with a compounding calculator, and you'll be impressed with how much you can accumulate over long periods. (Moneychimp.com has a good one -- just think of the "interest rate" as your expected average annual growth rate and leave it compounding once annually.)
Below is an example, demonstrating how a single $10,000 investment egg grows over decades at 10%, on average, annually. (The stock market's long-term average annual return is close to 10%.)
I took it out to 100 years mainly for the fun of it, but you can see that more than a million dollars can be amassed in half that time. To just clear the million-dollar mark, a one-time investment of $9,000 is actually enough.
The usual caveats and notes apply here, such as the fact that over any long period in which you invest in the stock market, you will likely average a return higher or lower than 10%, but there's a good chance it will be close to that, the longer you invest. Also, remember that the example features a one-time investment only. If you add to that over time, you can make your money grow much faster.
Here -- the table below shows you how a $10,000 one-time investment will grow over many decades at 10% -- if you also add a mere $1,000 to it every year.
See? Eye-popping, right? Of course, most of us aren't going to be investing for those really long stretches -- at least not for ourselves.
Compounded growth is like a piggy bank multiplier.
What it all meansWe can sock away some money for our children, though -- ideally ones not yet born. (If your kids are already grown and on their own, start thinking about your grandkids, born or not yet born.) If you invest $9,000 in a broad-market index fund in an account for a child who won't be born for another decade, it will have had 50 years to grow by the time he or she turns 40. Imagine that -- that there will be an account worth more than a million dollars available at that time.
Yes, inflation will have done its thing. At an average annual rate of 3% for 50 years, that $1,173,909 will have the buying power of about $294,570. Still -- imagine getting that kind of money at age 40! It would certainly get your retirement savings in much better shape immediately. And if you had added money along the way, the account could be worth more than twice as much in purchasing power, despite inflation.
Clearly, you can help your descendents be much more financially comfortable. Lest you be despairing for yourself, though, know that you can do a lot in a lot fewer years, too. For example, if you sock away $10,000 per year for 20 years and it grows by 10% annually, on average, you'll end up with $630,000.
Everyone can get much better off through effective investing. Take some time to explore your possibilities.
The article Make Your Kid a Millionaire With Just $9,000 originally appeared on Fool.com.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter,has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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