It’s obvious that those who start saving early end up with a lot more for retirement. But, what if you started saving for your kid from the moment they were born? Putting a small amount away each month, even as little as $5, would amount to $60 saved per year. By the time they reach full retirement age of 67 (for most), you will have $4,020 saved up. This number isn’t very impressive on its own, but if you take advantage of compound interest, you’ll be looking at a much higher number.
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Compound interest is when you earn interest on an investment and, over time, earn interest on the interest you’ve already earned. For example, if you invest $100 and earn 5% interest on it each year, you’ll earn $5 your first year. At the beginning of the second year, you’ll have $105. When you earn 5% on your new amount, you’ll make $5.25 and go into your third year with $110.25. As time goes on, the amount you earn from interest balloons even if you don’t add any more to the initial amount.
So, if you invested $5 for your kid each month, would they have thousands or millions by the time they retire? We used 67 as full retirement age since that’s what it currently will be for future retirees. Here’s what the numbers look like.
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$5 per Month
For most people, it’s relatively easy to set aside $5 each month for savings. If you put down an initial $5 investment and then start putting that same amount each month into a fund that earns 7% and compounds monthly for your child, it would start to add up and look like this:
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Year 1: $67.32
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Year 5: $365.05
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Year 10: $875.47
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Year 20: $2,624.83
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Year 30: $6,140.44
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Year 40: $13,205.62
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Year 50: $27,404.26
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Year 60: $55,938.70
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Year 67: $91,719.74
With a compounding interest of 7% each month, you effectively add $87,694.74 of interest to the $4,025 that you actually set aside. Not bad for a $4,025 investment spread out over 67 years.
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$15 Per Month
While having around $92,000 isn’t bad, it’s not enough for retirement. The median amount that retirees have saved by the time they’re in their 60s is $539,068. Let’s see what happens when the savings amount increases to $15 under the same conditions. Here’s how the math breaks down:
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Year 1: $201.97
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Year 5: $1,095.16
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Year 10: $2,626.42
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Year 20: $7,874.48
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Year 30: $18,421.31
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Year 40: $39,616.87
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Year 50: $82,213.77
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Year 60: $167,816.10
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Year 67: $275,159.43
In this scenario, your kid would earn $263,084.43 in interest on your initial investment of $12,075.
$30 Per Month
Having $200,000 for retirement set up for your kid by saving a few dollars every month is excellent, but it is still well under the median amount of $539,000 saved. To reach that amount by saving a set amount each month from birth, you would need to invest $30 per month for your child. Here’s how the progression looks:
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Year 1: $403.95
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Year 5: $2,190.32
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Year 10: $5,252.83
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Year 20: $15,748.96
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Year 30: $36,842.62
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Year 40: $79,233.74
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Year 50: $164,425.54
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Year 60: $335,632.20
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Year 67: $550,318.46
Not bad for only investing $24,150!
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This article originally appeared on GOBankingRates.com: How Much Money Would Your Kid Have at Retirement If You Invested $5 a Month From Birth?
