The power of Compound Interest

About two week ago, my good friend Samuel become the first time father of a healthy baby boy. Congradulation to him! :-)

Well, surely Samuel will want to provide for the best for his boy... a good education, fathery love... etc. One factor that need to address is the child finances. Some parent believe that it is the job of child to grow up and make a living for themself. As a parent, giving them a good education is the best they can provide. This is excellent except that there is another area that need to be address in planning for the finance of a child.

If Samual was to invest $1 a day (finance call it Dollar cost avearaging) in the US Index fund which gives a average of 12% return in the long term... say let we factor in a 2% margin of safety which give us 10% return, then in 54 years time, the money will compound to be $1 million dollars. Bring that to present value given discount rate due to inflation, it will be $200,000.
Not a lot of money? Well let say Samual was to invest $10 a day for the child in a investment that give 10% return, then in 54 years time, it will be $10m dollars. Bring it to present value with 3% discount rate, it will be $2m. Think about it... if you are to retire at age 55 with $2m net worth now, how will you feel? That is excluding your other long term assets that you own like a car etc. Will you not want this to happen to your child when he reach 55?

Of course, parent may not live another 54 years to put in money for the child. However, parent can first learn to invest for the child, built a stable investment system and cultivate in the child a habit of putting money in the system when they are old enough to make a living for the power of compounding to work in the child favour.

Just another illustration, if you can find an investment system which can generate %15 return yearly, for every $1 put in to the system everyday, the child will get $5m in 54 years. For $10, the child will get $50m.

Qoute of the day: Baron de Rothschidl was once asked to name the seven wonders of the world. He replied "I cannot, but i know that the eighth wonder of the world is compound interest."