How can I help ensure they invest?
Wouldn’t it be amazing if you could turn your kids into millionaires? As parents, we always want the best for our children—happiness, health, and success in life. One of the best ways to help them achieve financial security is by setting them on the path to financial excellence from an early age. This doesn’t mean winning the lottery or handing over your wealth, but sharing the knowledge and skills they need to build their own wealth over time.
With my own children growing into teenagers and soon young adults, I think about this a lot. I want to present this information in a way that sticks with them forever. After careful consideration, I have come up with a simple strategy that I believe will help my kids potentially become millionaires. This plan not only teaches them how money works but also gives them a significant head start on their path to financial freedom.
Let me share my plan with you. If you have children, this strategy might also be valuable for you in helping them understand money.
Anyone who has used a financial calculator or anything that shows compounding returns knows that the earlier you start investing, the better your chances of success. However, investing as a kid is tough because your only income typically comes from parents, and it’s usually spent on fun.
Looking back at my early financial years, a big change came when I got my first job at 16. I went from a $5 allowance to earning hundreds of dollars each month from my restaurant job. While I saved most of it, I wish I had taken it a step further. So, my advice to my kids is to start a Roth IRA.
Here’s the plan: If they invest the maximum amount of $5,500 per year into their IRA at ages 16, 17, and 18, and it earns an average annual rate of 10%, the benefits of starting early will kick in through compounding returns. Although the initial 3 years might not seem like much, the compounding returns over time will grow significantly. By starting at 16, nearly 9 years before most young professionals, those contributions could grow to about $996,973 by age 60!
Of course, getting a teenager to invest $5,500 in a Roth IRA, especially when retirement seems far away, is challenging. My plan is to make them an offer they can’t refuse: I’ll match every dollar they contribute to their IRA, up to the IRS maximum. So, if they put in $2,750, I’ll add another $2,750. By IRS rules, this is legal as long as they earn $5,500 or more. This matching strategy is like an employer matching a 401(k) and will motivate them to save more and more, besides the prospect of eventually having a substantial amount.
Additionally, this will give them a strong foundation in investing from an early age. They’ll learn about mutual funds, index investing, and capital gains, and see how investments can fluctuate over time.
To turn this into one million dollars adjusted for inflation, we need to continue investing $5,500 each year into their IRA until they’re 29. By then, their growth could reach $1,010,219 with inflation adjustments.
During their college years, I can continue the dollar-for-dollar match. Hopefully, by the time they graduate and start working, they’ll have learned the value of this financial opportunity and continue contributing to their IRA and 401(k). If they do, they could reach millionaire status even earlier!
Ultimately, the goal isn’t necessarily for them to hit a million dollars, but to see the opportunity that compounding returns provide. Starting early is a powerful way to build wealth passively. My hope is that this plan will motivate them to make the right financial decisions!
