I know that a lot of you, like me, want to give our kids, future kids, or even grandkids the best shot at life that we can give them. However, a lot of people don’t know how to go about the process. Well as the great mathematician Jacobi says, “invert, always invert.” It is entirely possible to leave your grandkids as millionaires if you are disciplined with your finances. If you are disciplined then the next step is the hardest, because it is the step where most people fail. It is executing your plan. Take a deep breath, and commit because if you do, the familial rewards of giving your family freedom from financial stress can be a great blessing.
Let’s say you decide to save money for your grandkids. You are pretty young, and it is going to be 60 years before your grandkids turn 30 years old. Giving them a cash gift at 30 years old would allow them to pay off some or all of their student loans, pay for a wedding ceremony, put a down payment on a house, or start a business. Ok, so how much cash are we talking about? What would happen if you decided to sock away a $100 a year for the next 10 years in an S&P index fund and reinvested the dividends? Since we know the index has historically returned about 10% annually over long periods of time, that will be our compounding variable. After that, you stopped contributing to this fund; what happens? Well you calculate an ordinary annuity for the first ten years you are contributing and you come up with $1593.74. Big deal you say! That doesn’t accomplish anything, and takes away from my enjoyment. Well wait a second, you still have 50 years left for this money to compound before it is used. What happens? Running the numbers, you leave your grandchild $187,090.50. By saving a little less than 30 cents every day for ten years, you would leave your grandchild a very sizable chunk of cash that they could use to get their life started. That is the power of compounding small amounts of money over large periods of time. (I would be remiss if I didn’t mention how taxes and inflation would play a role in this calculation. I assumed you held these in some sort of tax free mechanism. If you hadn’t the numbers would be lower.)
Ok, lets up the contributions to $100 a month. Same process and inputs as the example I used above. What happens? You would leave your grandchild $2,244,966! That would provide your grandchildren a very decent amount of money to use in their personal lives. At a 2% dividend yield, your grandchild’s ownership of America’s largest businesses would be sending them a yearly allowance of a little less than $45,000 a year. They could take very nice trips to Disneyland every year with their children. Your family could use that money to buy really nice furniture. They could even set that money aside for their children to pay for their educations. You would be setting up your family for a much easier pathway through life. I don’t know many people who would have turned down a $2,000,000 gift from their grandparents to help get their life started. The sad part is that not everyone, for good or ill, is thinking of how to do this for their family. It isn’t possible for everyone to save thousands of dollars a year, but if you can, consider setting something up to benefit your family down the line.
I know that I have harped on this a little bit, but I will continue to do so if it manages to get inside even one person’s head. Your teens and twenties are your greatest chance at wealth maximization. This doesn’t mean you shouldn’t buy things that you enjoy, but you do need to know the opportunity costs of what you are buying when you are this age. Do you want X or do you want Y? I know it sucks that it is precisely when you are finally reaching the independence to do what you want, that your knowledge about the world is at its lowest point. But it is at that point that your dollar has the greatest chance at getting you financial independence. Unfortunately, a lot of people only get exposed to this stuff online if they take an interest in this because schools don’t teach this stuff. Then to add even more difficulties it isn’t until people are in their 30s that they learn this stuff. By then, the value of their dollar has eroded immensely, and it hurts them because they then have to spend a higher percentage of their check to finance their retirement or give a cash gift to their descendants with minimal cash outflows from their life.