I was inspired to write this post after reading a recent article in the SMH by Noel Whittaker.
Cappuccino or latte (cafe latte) is about $3.50 in Sydney. Can you build a nest egg just by forgoing one cuppa a day? You bet.
As a parent with a young toddler, I believe starting an early savings plan for my child is an exceptional idea. With a long runway, not only can kids fully harness the power of compounding but the savings plan can teach them the benefits of delayed gratification/ savings.
The idea is to start a retirement plan the day your bundle of joy is born.
The investment horizon is 65 years (that’s sort of the average retirement age) and the fund would be invested in shares. Shares do not only produce very good long term returns (history has shown that these returns are anywhere between 6%-9%), they can also be bought with relatively small sums of money (as opposed to real estate or commodities), brokerage is cheap and they have zero maintenance cost.
A low cost ASX 200 ETF will be a reasonable way to accessing these returns.
If you start an investment plan which invests $3.50 a day (I would recommend investing into the market on an annual basis to avoid paying too much brokerage fees) for your child and assuming an annual compound return of 8%; the nominal value of the plan at the end of Year 65 would be $2.55 million (before brokerage fees and fund management costs). Assuming a 2% long run inflation rate, this would be equivalent to $704,909 in today’s dollars, not too shabby for just one latte a day huh.
I would argue that after seeing such wonderful results, your child would probably be eager to contribute much more than $3.50 a day when he/ she enters the workforce.
I’ve included the math in the table below. Like me, if you start the plan when your child is older than zero, then just subtract his/ her age from year 65 and take the value from that corresponding year.
The table below shows a combination of daily savings rate (from $1 to $10) and long run annual return (6% – 10%) and the resulting balance (nominal dollars) at the end of Year 65.
Read here for the Noel’s article. If you read his article, I suspect the difference between his figures and mine are due to different compounding frequencies.
This post gives me some motivation to update the ASX All Ordinaries long run return, originally posted here.