We all want to give our children the security of a good financial future. But, making your child a millionaire may seem out of reach to the average New Zealander. Getting there is easier than you think if you start early and make small regular contributions during their life. The key is a managed fund, like KiwiSaver, that builds up compound interest over its lifetime.
What is compound interest?
Compound interest essentially means “interest on interest” and is the reason so many investors are so successful.
For example, if you invest $10,000 which pays 8% compound interest on an annual basis. After the first year, you would receive $800 interest into the account resulting in a balance of $10, 800. In the second year, your 8% interest is calculated on this new balance of $10,800, so you would receive $864 interest. The longer you leave the account earning interest, the more ‘interest on interest’ you will earn. In this example, after 30 years your original $10,000 would behave ballooned to over $100,000
Simple steps to make your child a millionaire:
- If you put $200 a week into a managed fund for your child, and it returns 7% per year after fees, over the course of their childhood you would end up with $296,659
- Then you sit back and do nothing. Simply leave the money in the fund and let the returns grow and earn more year after year. After 27 years of doing nothing, they would have a balance at age 47 worth $1.079 million, in today's terms
Source: Stuff
How to use KiwiSaver to create a secure future for your child:
Accounts, like KiwiSaver, that pay compound interest play an important role in creating wealth and stability. Establishing a KiwiSaver account for your child can help build saving disciplines in early life that will set them on a good financial path. When your child starts their first job, they will already understand the benefits of regular saving and investing. Small, regular contributions can grow dramatically when done consistently over a lifetime.
-If a parent put $1000 into a KiwiSaver account when a child was born, then put in $20 a week until they were 19, they would end up with around $63,615 – enough for a first-home deposit if they were buying with someone else.
-If the parent contributed $250 a month to the fund up until the age of 18, the fund would tick up to over $1m around the time the child turns 39
Taking advantage of accounts like KiwiSaver that pay compound interest, play an important part in creating wealth and stability. It is important to think about which type of KiwiSaver fund will suit a child best. Children may automatically be joined to a conservative fund, which means that they could miss out on thousands of dollars interest that they would receive if they were in a growth or more aggressive fund. Our KiwiSaver Guide outlines the benefits of KiwiSaver and types of funds available.
Use our KiwiSaver Comparison Tool to compare KiwiSaver Funds, to help you choose the KiwiSaver Fund that’s best for you or your family.
