Guaranteeing An Inheritance For My Son

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One characteristic of living in a consumerist society is that individuals are not taught how to save for their future, yet alone the future of their children. Whether due to ignorance, fear, or wanting to seem cool, nearly all parents and teachers will fail to instill financial literacy into young people. For the few young individuals that are able to grasp the concept of spending less than they earn, without having any positive examples to reinforce this valuable life lesson, they will face a strong conflict between choosing to live below their means in contradiction to the “I deserve it attitude,” or wanting to fit in with their broke friends, ultimately embracing the lifestyle of “keeping up with the Joneses.”

Strong conflict may be a grievous understatement because the truth is that global corporations are working tirelessly to enslave us to the metaphoric hamster wheel. They consistently communicate to us that we are deficient and lacking if we do not have the latest iPhone, the newest model, the upgraded package, the coolest shoes, or the biggest house. As a result, many individuals’ American Dream has become a nightmare that includes owing $25,000 on their vehicle which has depreciated in value to only $17,000; wondering if the transaction will go through to buy their child the overpriced Nike sneakers; and questioning if they love their partner enough because they did not get a loan to buy her a $10,000 diamond necklace for Christmas.

Despite how fierce this sounds, it is just a small reflection of the reality that the ceaseless, vampiric, oppressive greed machines promulgate as healthy and normal lifestyles. Granted, each person is responsible for their own financial decisions, but the fact is that it is an uphill, and most often, costly battle to overcome the deceptive ploy that the newest things will bring your life happiness and satisfaction. Having my eyes open to the cunning of this materialistic age leaves me with the immense desire to live intentionally, so as to only spend my money on the things from which I get true fulfillment. Further, as a new father, I am left with a feeling of responsibility to ensure that I pass on the same kind of awareness and understanding to my son.

The Bank of Dad

In addition to setting the example of paying yourself first, another tremendous way to teach your child the valuable lesson of only spending money on things that give you fulfillment is to encourage them to save their money from an early age. As a formidable plan, this will require some preparation on your behalf. Similar to how many employers match a portion of an employee’s retirement contributions, the plan is to incentivize your child’s saving habits through the matching of their savings contributions. The goal of this parental endeavor will be to match 100% of your child’s savings until they are 18 years old.

Implementation

New Dad, this sounds pretty ambitious. You are saying that I should equally match every dollar my child saves until they are 18 years old?

That is the idea, which is why we will now go over how to practically prepare as a parent to complete this climb.

  1. Open a joint savings accounts for you and your partner.

  2. Setup a direct deposit such that $25 is deposited into this jointly held account every other week.

  3. This means that at a minimum, you will be saving $650 per year on behalf of your child ($25 x 26 times a year).

  4. After 15 years, you and your partner will have no less than $9,750 in the account. How incredible is that! In case you are wondering, this only requires intentionally setting aside $1.78 per day for your child’s future.

  5. Along the way, you will need to setup another joint savings account, but this time with your child as a joint owner. This is the savings account where your child will one day start making their own contribution decisions, so you should ideally get this done before their fifth birthday!

It is not likely that your child will have much income their first 15 years because of child labor laws, which means that once your child gets their first summer job, you will have close to $10,000 set aside to motivate them to save! Even considering that my wife and I plan to match our son’s savings no matter the source of the funds (for example, if he saves 50% of birthday money that he receives), I still expect that we will have close to this amount set aside when he starts working as a teenager.

Time to be a nerd

Now, let’s have some fun! Let’s assume that your child’s savings contributions have resulted in him saving $11,700 by the time he is 18 years old. By this time, since you have kept on setting aside $25 every other week, you have preemptively set aside this amount too ($25 x 26 times a year x 18 years).

Additionally, because each year that your child has earned income (15, 16, 17, and 18 years old) you have strategically guided him to place these savings into a Roth IRA, instead of placing them into a typical money market account at the bank, the funds are now sitting in an incredible investment vehicle by which your child should reasonably expect to never pay taxes on any of the future returns. Further, since you had already set aside the matching funds as an encouraging factor in order to get your child to save so much of their money, there is actually $23,400 sitting in their Roth IRA!

(Be on the lookout for an upcoming post in which I will specifically discuss how you as a parent can optimally help your child fund a Roth IRA. You do not want to miss it!)

Incredible, at 18 years old your child has no less than $23,400 saved in one of the greatest investment vehicles available! Now, the title of this article is “guaranteeing my son an inheritance,” so although $23,400 is a nice sized sum of money, we are not done yet.

Using a simple compound interest calculator; with Warren Buffet’s conservative annual market return estimate of 7%; for a duration of 41 years, which is when your child will be “eligible” to withdraw this money from the Roth IRA; with no future contributions, your child will have over $409,000 in the account.

This is not a typo, and if we instead use ChooseFI‘s expected annual stock market return of 8%, your child will have over $615,000 awaiting him. Plus, to reiterate, because this is a Roth IRA, your child will never pay taxes on any of this money!

It’s ok, this may feel overwhelming or unrealistic, but the math does not lie. Take a minute, have a sip of water, and pick your jaw up off of the floor.

If you recall from a recent post, 75% of Americans have less than $10,000 in savings. Yet, by simply deciding to set aside $1.78 per day and teaching your child the importance of saving from a young age, your actions will likely provide them a larger sum of money than 90% of people can even imagine ever having. In closing, assuming that you raise your child as financially responsible parents, and teach them through your example the value of only spending money on meaningful things, this inheritance that you have taken steps to prepare will likely just be extra gravy in their already wonderfully abundant life!


“The philosophy of the rich and the poor is this: the rich invest their money and spend what is left. The poor spend their money and invest what is left.”
Robert Kiyosaki
Rich Dad Poor Dad

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