How to Create Wealth for Your Children or Grandchildren

Create Wealth for Children or Grandchildren

The impulse to help our children and grandchildren is strong in most of us. One way to help them establish financial security in life is to start putting money into mutual funds for them when they are young, and ideally, when they are born. Starting an investment program that has 40 to 60 years to grow is the way to create wealth for children or grandchildren. If you are in a position to do this for your children or grandchildren, they will be forever grateful.

Things You'll Need

• A Vision
• Children or Grandchildren

Instructions

1. Decide how much you can afford to set aside for the child or children each year. Remember, the longer the money has to grow the better. Let us say that you can commit to $3,000 per year for a child's first 10 years of life. If this is beyond your means perhaps you can share your plan with other relatives and enlist their support to create wealth for the child or children.

2. Set up a trust through a bank or attorney to help create wealth for the child. Stipulate that the earliest the child can have access to the money is 40 years old or later. That is so the money has a chance to really grow and that the child will have an incentive to work and develop a career in his or her youth.

3. Invest the money in a small number of mutual funds (four or five) that have a good track record for at least five years. Divide the money over the years into Aggressive Growth, Growth, Growth and Income, and an International fund. Perhaps use an industry sector fund as well, such as Technology. Choose the option to have dividends and capital gains reinvested. See the Resources provided below for more information on mutual funds which can work over the long term to create wealth for children.

4. Do the numbers: 10 years of investing $3,000 for a child costs you $30,000. By the end of that 10 years, assuming an 8% compound annual growth rate (CAGR), that $30,000 should be worth about $45,000. After the first 10 years the real magic of compound growth takes effect. By the rule of 72 (see Resources), growth at 8% compounded annually doubles the money every 9 years (72/8 = 9). By the time the child is 46, the $45,000 has doubled four times in the 36 years from age 10. Four doubles of $45,000 amounts to $720,000. That assumes no more money is invested for the child after the first 10 years.

5. What would happen if the recipient did not need the money until age 64? Well, at the same 8% rate of compound annual growth, there would be six doubles instead of four (54/9 = 6). Six doubles of the $45,000 amount at age 10 would grow to a staggering $2,880,000 ($45,000 x 2 to the 6th power). All these amounts neglect the effect of taxes on reinvested distributions, which is oversimplified, but the numbers shown illustrate the order of magnitude of growth over 36 years and 54 years. This is how to create wealth for children or grandchildren.

6. If you are able to put a modest amount aside each year for your children or grandchildren, do it for 10 years and you will have ensured their financial security for midlife and later. If you need the help of other grandparents or relatives, see if they will agree to participate in a plan like this. Everyone will be happy about the projected outcome.

Tips & Warnings

• If you dig this article, please Digg it.

• Get professional advice to set up a trust that will allow the money to grow untouched for the needed number of years.

• Share this article with relatives who may be in a position to contribute or to do it for their own children.

• Prepare a financial responsibility pledge that the child will be required to sign at 18 or 21. This should include, at the least, debt limitations and periodic financial counseling sessions.

• Conflict among relatives must be avoided! If someone is not interested, let them go without a guilt trip!

Resources

• Mutual Fund Investing
• Rule of 72
• How to Use Compound Growth to Create Wealth
• How to Invest in Mutual Funds
• How to Use Dollar Cost Averaging
• How to Create Wealth When You Are Young
• How to Save Money for Specific Goals