[AJC: This is the journey that you may be on right now; you know, the one where you read Every Available Book And Blog on Personal Finance Looking For the Mythical And Magical Secret To Financial Success But End Up Settling On Becoming A Miser Disguised As A Debt-Free, Frugal-Saver]
… I remember being very impressed by a tape set [AJC: Yep, that’s a cassette tape set] about a guy who had a ‘system’ to guarantee that your children could become billionaires in their own lifetime.
I no longer have the tape set, but it was all to do with putting aside $x per week (and, adjusting for inflation) and relying on the power of compounding (sic) to allow the sum to run up to $1 billion.
Sounds simple, so I ran a few numbers on my own, and here’s what I came up with:
– Put aside $5 a day, beginning the day your children are born
– Increase by 5% each year and keep up for 40 years
– Vest the sum into your children’s names when they are 80 years old
Then they will each have $63 million dollars!
Not exactly $1 billion, but not a bad sum, right?
Now, it’s really a Grandchildren’s (or, Great Grandchildren’s) Plan, because your children may not even be alive at 80, but if they do the same for their children, and so on, it’s a reasonably smart and easy Generational Wealth Plan and your progeny will thank you for it (well, you won’t be alive, but take my word for it).
But, there are (other) problems:
– Your children have to wait until they’re 80 to ‘cash out’
– You have to contribute for 40 years, starting with $1,825 year and ending with $12k a year (probably, when YOU need it more than your children do)
– And, $63 million is ‘only’ worth – a still healthy – $5.5 million in today’s dollars
Ashley Ormond (a fellow Aussie) has a more practical, shorter term plan in his book that shows you “how to give your kids $1 million each!”
It’s essentially the same kind of plan, obviously running for a shorter period, and includes interesting tweaks such as having your kids pay you back your $7k initial contributions. It also includes sensible children’s savings strategies (such as setting them up with individual ‘saving’, ‘spending’, and ‘investing’ accounts) … but, the rest of the book is Aussie-specific.
Still, all these ‘power of compounding’ books and strategies show me – after spending a LOT of time, in the service of writing this blog, playing with simple spreadsheets (and, you should do the same) – is that there is no real power in compounding at all …
… it’s just simple maths and (a lot of) time, and if you rely on it for your real wealth … well … you’ll never have any 😉