As we all know, becoming a self-made millionaire is no mean feat more so for a child. However, through saving, some well-timed or wise investments, and a little financial education, you can set your kids on the right path. CEO Praefinium Partners – Alpesh Patel OBE lists several methods that show you how to make your child a millionaire.
A junior ISA is permanently tax-free. They come as either cash ISAs or as an investment wrapper. In the 2020/2021 tax year, investors could place as much as $9000 per year that will be locked away until a child’s 18 birthday, at which point it becomes a regular ISA.
However, for parents, choosing the suitable Junior ISA is essential. Depending on the age of your child, an investment wrapper could be the right choice. Investing tends to outperform cash over the long term; however, investment comes with more significant risks. Cash ISAs tend to perform slow and steady but typically produce returns below the stock market.
Of course, if you want your child to become a millionaire, you’ll need to start saving early. Setting up a stakeholder pension for them once they are born is a great way to get them on the way to a comfortable retirement. You can contribute a maximum of £3,600 per year, but basic-rate tax relief of 20% means this will only cost you £2,880 per annum. With just 6% annual interest, this pot would rise to £516,134 by the time they are 38 years old.
If combined with a large junior ISA, this could leave your child well on the way to seven figures.
If you want the best returns, you should consider investing. While it is riskier, the rewards are often much more significant. Paul A. Merriman makes the case in a Marketwatch post that $1 a day can result in seven-figure gains from small-cap value stocks.
By investing $365 per day in low-cost ETFs at around 12% a year, the parents’ $6,570 could compound into $20,348 by the time their child is 18. By setting up an individual retirement account (IRA), this child can then add this money tax-free and watch it grow.
Holding onto these funds at a 12% compound interest rate throughout their working life is where this method really delivers. The nest egg could grow to a staggering $4,185,342 by their 66th birthday.
Of course, setting up savings and pension funds for your kids is just one method. Another, favoured by Warren Buffett, is about teaching children financial literacy from an early age.
Indeed, Buffet is so serious about this that in 2011 he created a children’s cartoon series Secret Millionaires Club.
Buffet has many lessons to give anyone about financial management, but for kids and parents, he keeps things simple.
Chief among his advice is teaching financial literacy as early as possible. Setting a good example and demonstrating the value of even a tiny level of savings are all tools that should be passed down to younger children.
Buffet also suggests that instilling children with an entrepreneurial spirit and a constant desire to learn are vital factors for ensuring financial independence.
Turning Your Kid Into an Investor
Of course, we won’t always be around to help and look out for our kids. So teaching them how to invest while we can is an excellent idea.
With the bulk of our brain growth happening by three years of age, your can teach financial concepts in these formative stages.
While that might seem young, this study by the University of Cambridge suggests children can grasp basic money concepts aged 3-4.
The pandemic — and resultant enforced homeschooling — provided an opportunity for many parents to orient their children towards money management.
Alpesh Patel’s Conclusion
A mix of intelligent investing and education is required to help your children retire as millionaires. Consistent savings and a combination of investments and junior ISA are all that it takes to net seven-figure retirement funds. However, teaching financial guidance is a must.
I’ll return to Warren Buffett for the final word. He suggests that the number 1 financial mistake parents make with their children is teaching them financial literacy too late.
To conclude, it’s never too early to start saving, investing, or learning.
What defines a worthy stock for investment or retirement income? Unfortunately, for many investors, the answer is a stock that pays dividends.
While dividends are a factor (among many) that can be used to judge a stock. It isn’t necessarily the most important or profitable determination to make when investing.
The world’s greatest investor and some Nobel Prize-winning economists agree that a portfolio that focuses heavily on dividend-paying stocks is leaving money on the table.
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Alpesh Patel OBE