Thursday, April 17, 2008

Teach A Child To Become A Millionaire

Recently, I wrote an article on how to Become A Millionaire, based on saving $158.15 monthly for 40 years. Not too long afterwards, Yahoo Finance! published The One Year Million Dollar Challenge and offers an alternate approach, one payment of $20,500 and wait 41 years. Both approaches assume a 10% annual return on the savings.

Here's one way I might combine a periodic and single amount contribution to help our our three year old daughter become a millionaire.

  1. Start working at age 16. Optimally, it would be working for a future family business, since there is an additional tax benefit of not paying social security taxes. However, for any case, she could earn up to the standard deduction ($5450 for 2008) and pay no federal income tax. Assuming she made the minimum wage ($5.85) for 10 hours per week, she could earn about $2737 a year after state and social security taxes.

  2. Put the entire paycheck amount in a Roth IRA. Since she has earned income, she can contribute up to the maximum of $5,000 or wages earned, whichever is less. The major benefits of a Roth IRA are that earnings grow tax free and withdrawals after 59 1/2 are tax free.

    Alternatively, the parents can make the contribution for the child and let them use the money they earn.

  3. Contribute for at least $ 2700 for 6 years. At 23 , her savings would be worth about $20,800 at a 10% return, which is above the amount needed for the One Year Contribution.

  4. Invest the savings in a diversified stock market index and wait 41 years. With a 10% return, the Roth IRA would be worth about $1,000,000 after that time.
I like this approach since it would help her learn about setting a savings goal and then doing it. Of course , there is no guarantee that the stock market will return 10% in the future. Also, a million will be worth less in 41 years due to inflation. However, having a million dollars or getting close is still always better than not having a million or being close :-)

For more on Crossing Generations, check back every Thursday for a new segment.

This is not financial or parenting advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

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