By: Curtis Ray, CEO of MPI Unlimited
We all want to make sure our kids are set up for future success. We teach them manners, critical We all want to make sure our kids are set up for future success. We teach them manners, critical thinking, and other essential life skills that they’ll need when they branch out on their own. Of those life skills, it’s imperative we do our best to also set them up for financial success.
For me personally, as a parent and an expert in financial planning, this means setting my kids up with a compound interest savings account.
Compound interest is when a sum of money makes money by itself, and then that money makes additional money. It’s a snowball effect that progresses with time and it’s also the missing key to most financial plans. Whether you’re saving for your child’s college tuition or giving them a head start on retirement, opening a compound interest account for them not only gives them a nest egg to lean on but can also be used to teach them how to be responsible with money.
To better understand the inner workings and benefits, here are three reasons why you should start a compound savings account for your child:
1. It Gives Your Kids a Secure Financial Base
Whether your kids are just learning to talk or getting ready to take on high school, the first and most important step to giving them a secure financial base is starting to invest in them now. Compound interest accounts take time to build wealth and continue to make more money the longer they are open.
Getting started as early as possible is important. Putting away as little as $1 per day for 18 years will give your kids somewhere between $7,000 and $14,000, depending on what compound interest vehicle you choose. Now, if you bump that up to just $5 per day for 18 years, suddenly your account can yield anywhere from $34,000 to $65,000. That’s the power of compound interest.
By the time they’re 18, you will have given your kids the opportunity to minimize their college debt, purchase a home or car, or even given them a head start on their retirement.
2. Your Kids Will Understand Financial Literacy
It might sound scary to hand over an account with up to $65,000 in it to an 18-year-old. However, one of the benefits of starting to save and invest in your kids early is the opportunity to teach them financial literacy, giving them the tools to use, or save, this money wisely and giving you peace of mind.
Just involving them in the process of putting money into their accounts is already teaching them the power and importance of compound interest. Watch the money grow with them and explain how the money accrual works along the way.
Because the topic of money will already be on the table, rather than a taboo subject, you can also take this time to teach them how to protect their money. Show them how to stay away from bad investments, pyramid schemes, and “get rich quick” plans. Instead, encourage your kids to learn more about low-risk investments that protect their principal and offer growth. Luckily, with your compound interest account already underway, you’ll already be demonstrating how money can grow with time and patience.
3. It Will Ease Your Own Financial Burdens
I know that taking the time to save money for yourself, especially during uncertain times like a global pandemic, can be hard enough. Now, add in the additional expense of putting away money for your kids and it might seem overwhelming. But it doesn’t have to be.
It is important to choose an account or other investment vehicle that utilizes secure, compound interest. The earlier you start, the less principal you have to invest to see greater returns.
Starting to save now will give you, as a parent, more security in your child’s future. It will equip your little ones with the tools and the means to take on big life expenses like college, deal with unexpected costs like medical bills, and continue to save for their own futures, like retirement or potentially their own kids one day.