FOOL ON THE HILL
How can you make your kid richer than you ever were? The formula isn't difficult: one part index fund, two parts perseverance, and three parts time. Bob Bobala maps out how he's going to make a new member of the family a millionaire this Christmas.
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I am home for the holidays this year. It's a rare occurrence. In fact, since I've been working at the Fool, my parents have hosted cast members from the musical troupe Up With People more than they have their only son. I don't blame them -- those Up With People people are surely more entertaining and talented than I. You should see me trying to sing "Silver Bells." But I made the commitment to come home this Christmas when my first niece was born last May. We'll call the star attraction in the Bobala household this holiday by her initials, T.K., so that when she reads this in the Fool archives years from now, she'll be less embarrassed. At least she didn't get stuck with my last name, so she'll endure far less humiliation throughout her lifetime than me. Now before you click over to ESPN.com or E! Online, let me assure you that this is not going to be a sappy column about some guy getting gooey over his new niece. I have no kids of my own, and there's a reason for that. No, it's not due to my abrasive personality and horrible disfigurement. I just haven't developed enough of an infatuation for the critters to actually have one. The five-minute baby-sitting stints with the three-year-old next door is enough adventure for me. So, I'm not even sure how to angle for my niece's affection. I'm thinking of implementing a two-phase plan, though. First, I'm going to be the most boring uncle on the face of the earth, contributing to her retirement fund for her at every birthday and Christmas rather than buying her all sorts of goodies. Second... well, it's the same plan, but if we can stick with it throughout the second half of my life I'll become the grooviest uncle of all time. T.K.: Blah, coo, ga [spit up, spit up]. Fifth birthday, 2007 T.K.: Mommy, who is the strange man who talks about money all the time? 12th birthday, 2014 T.K.: Uncle Bob, did you really date Britney Spears when you were younger? Also, just once, it would be nice to get a gift certificate to Wet Seal (Nasdaq: WTSLA). High school graduation, age 18, 2020 T.K.: How did you know about Vito? He thinks I should buy a car with the money you've been saving for me. 25th birthday, 2027 T.K.: I can't believe you've stuck with this for 25 years. I'm so touched. I hope I can do the same for one of my kids someday. Wedding, age 30, 2032 T.K.: This is tough. The money has grown enough for a good down payment on a house. I appreciate everything you've done. Vito and I will talk it over. Christmas, age 45, 2047 T.K.: Half a million dollars is a lot. You passed Uncle Brian as my favorite uncle somewhere in my mid-30s! And you look charming completely bald. 52nd birthday, 2053 T.K.: I can't believe it. A $1 million gift at my first Christmas was the best thing anyone could've given me. You were always my favorite. You know how you were wishing you wouldn't have to walk up stairs anymore? I may be able to put in that elevator for you now. You're the best! Make your own kid a millionaire Get started right now with a little help from the Fool brokerage center. Bob Bobala is the managing editor of The Motley Fool. He owns an index fund himself, and thinks about it every time his niece spits up on him. The Fool is investors writing for investors.
Here's how I see it going....
First Christmas, 2002
Me: T.K.! You look ridiculous in that Santa's elf get-up your mother has put you in. But your early years are all about family. Your embarrassment over the videos later in life is not a consideration. But fear not. I am giving you the ultimate gift: $1 million. That's right, one million smackeroos. You didn't know your uncle was this rich, did you? Well, I'm not. But I'm a magician, and I'm going to turn the $1,000 I put into a stock index fund for you when you were born into one million dollars!
Me: Yo yo yo, T.K.! I put another 100 bucks in your retirement fund this week. Happy Birthday!... Yeah, I know it's not a Barbie or something fun for you now. You can't actually see it or touch it. In fact, I'm the custodian of your account until you're 18 -- so you can't go blowing it on fast cars and fast boys until I teach you the time value of money and you can make your own rationale decisions. We've got about $3,500 saved up for you right now.
Me: T.K., I know you were hoping for a bicycle or Britney Spears' Greatest Hits, Volume 5, but you guessed it: I put another $100 into your retirement fund. We're right on schedule, earning the market's average annual return of about 11%. We've tripled your money since you were five, and you're sitting on about $10,500.
Me: T.K., here's another $200 for your retirement. This is a big moment. You legally take control of your money this year. I can't do jack if you want to blow it all on a nose-ringed boyfriend named Vito your mother hates, or on a graduation trip to Vegas to let it all ride on Black. The choice is yours. You can take the $22,000 and run. Or hold out for door number three -- it could be one million dollars!
Me: Hey, your car insurance premiums finally go down this year. Super sweet! Aren't you glad you got that used car instead of listening to Vito and blowing your retirement money? As a reward, here's another 100 smackers. We're up to $50,000 now.
Me: I can't believe you and Vito have lasted this long! Personally, I don't care what your mother says -- I like the guy. Just keep him away from your money. Sign a prenup, kiddo. We're really cooking with gas now -- up to about $155,000. I'm throwing in a full $200 more today.
Me: Phew, that 20% market drop in 2043 gave me the willies -- it reminded me of 2001, in fact. But we're back on track now with some average gains the past couple of years. You're up to $470,000 now -- and you wanted to put it all into a house when you got married. Remember, it's for retirement -- early retirement, if you want it. I'll kick in another $100.
Me: Dear T.K., I'm an old, old man, and my work here is done. I'm not giving you another darn dime. You're only 52 -- you have half your life still ahead of you -- and you're a millionaire. Do what you want with the money. Start drawing on it; take a trip to the Caribbean -- whatever you want. Or leave it alone for another 10 years, and if the market grows at its average pace, you'll have $3 million. Yes, $3 million.
Here's how you can set your own kid up for life: Open an UGMA account (it will save on taxes in the beginning years) for your child at birth with $1,200 in an index fund. You can be the custodian of the funds until they revert to her when she turns 18 (or 21, in some cases). Contribute $20 per month to the fund indefinitely. If the market achieves its historic average return of about 11% per year, your kid would have $1 million by age 52 -- which could triple by the time she reaches full retirement age in her 60s.
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