One of the “secrets” of wealth is long-term investments that pay compound interest. When given a choice between a good investment with compound interest and a great investment with simple interest, pick the good investment every time. Over time, the investment that compounds will outperform.
Throughout stock market history, the average yearly returns for periods of 25 years or longer has been around 9-10%. For example, the yearly returns from 1900-2009 was 9.4%. For the last 25 years, the annual return was 11.9%.
So the secret of wealth is to invest when you are very young so you have time on your side. When your child is 16 and starts his first job, match his income and place that amount in an IRA account. Do this every year for five years and your child will be a millionaire by the time he or she retires.
Let’s illustrate with an example. When your child is 16 years old and starts his or her first part-time job, you place $2,000 into an IRA account for your child every year until he or she reaches age 20 for a total investment of $10,000. Even with no further investments, your child would have about $1.1 million by the time he or she retires at age 67 (assumes 10% interest). That $10,000 investment allowed your child to retire a millionaire.
Opening an IRA for your children when they are young is probably one of the easiest and surest ways to make sure your kids will have a great financial future.