My son just started his junior year of high school, and although I have plenty of time to make a decision, I’m already contemplating what I want to give him for a graduation present in a few years. Television shows and movies tend to exaggerate what teens get from their parents for high school graduation. A brand new car might seem like a common gift, but the digital radio alarm clock I received from my parents is likely closer to the norm. Still, what if parents could give their child a Hollywood worthy graduation present? Would you believe me if I said you could give your son or daughter $60,000 for a graduation present? Here’s how I think you can do just that.
But first, let’s talk about me for a second. I am currently contemplating whether I should give my son $1,000 for his graduation present. The gift will come with a couple of restrictions.
- He doesn’t get it in cash, it must be invested.
- He cannot touch it until he reaches the age of 65 years old.
Thinking about the restrictions got me thinking – how much would $1,000 turn into through decades of compounding? Bloomberg suggests that long-term investors should expect to earn 6-7% per year on investments once you factor in inflation. For example’s sake, let’s use 6.5%. After 47 years, that $1,000 would be worth $19,294.41.
Not bad, but I wondered to myself how much better the sum could be had I invested $1,000 for my son on the day he was born and then gave the investment to him as a graduation present. After redoing the calculations using the same 6.5% average yearly growth, $1,000 invested on the day he was born would be worth roughly $3,100 on graduation day and grow to just shy of $60,000 by age 65.
Obviously, the numbers used in this example are heavily dependent on the assumed rate of return. This means that the final sum could easily be much higher or much lower. Regardless, parents have the ability to give their children something significant by investing a sum of money very early in their lives. Parents could use this opportunity to give their children three things:
1. The Power Of Investing
By showing them periodically how much the investment is worth and helping them keep it invested smartly, children can easily see the growth of their money over time.
2. The Value Of Saving For Retirement
As the child goes through adolescence and through their college years, they will see how much their fund has grown over the years. They will understand that time is their greatest asset and be more knowledgeable and apt to start investing for their future when they enter the workforce and start their careers.
3. A Nest Egg
While the $1,000 investment will not be even close to enough to live on when they retire, every little bit will help. You may not be around anymore, but that nest egg can be your legacy. Hopefully, it will also prompt them to pass on good financial management skills to their children as well. I missed out on the opportunity to start my son’s investment when he was born, but I’m seriously thinking of giving him a $1,000 investment for a high school graduation present.
Contributing The Sum to a Roth IRA
One wrinkle with all these fantastic sums decades down the line is how taxes will erode the returns. However, I can circumvent Uncle Sam by putting the gift into a Roth IRA in my son’s name. Since you cannot contribute to a Roth IRA unless you have earned income, I will start adding money into his account each year he has a part time job. I also plan to just put the money in the Vanguard Total Stock Market Index Fund ETF (VTI) with dividend reinvestments turned on. That way, the money can grow tax-free and the growth will be fully automated because investing in that ETF is a bet that the economy will continue to grow and that the stock market as a whole will capture that return over time. Set it and forget it. Easy peasy.
You can plant the seed of a fantastic gift by making an investment for your child early in his/her life. Giving them the fund at their high school graduation would give them something to continue to watch grow, as well as financial lessons that will help them become a more financially savvy adult.
That’s a much better present than an alarm clock.
Do you have a young child or one that is getting close to high school graduation? Would you consider giving them an investment as a graduation present?