Please don’t save all of your money for your children.
This is a letter I wrote to some of my friends of the boomer-generation after discovering that they were trying not to spend money and save money in the bank for their children and grandchildren. It is not investment advice as I have no formal qualifications in such matters.
Assumptions:
- you are going to die in 20 years
- you have £100,000
- you are going to try not to spend anything to leave it for your kids
- Inflation is about -2% a year, so this is basically eating your money. I think -2% is actually too low, in terms of real costs and the new world economy the way it’s looking I am am think it’s more like 4–5% so I’ll show you that one later.
Scenario 1 — Save ever penny in the bank at ~0% interest and 2% inflation.
In 20 years your £100,000 is worth £67,000 which you will leave to your ungrateful little sprog
Scenario 2 — Bit of both
Put £50,000 in a proper investment account for your kids future at 5.5% per year interest after inflation this is worth…. £150,000.
You get to go on 25 proper blow out holidays at £2000 a pop and cruises in the mean time.
Scenario 1b) — Real Inflation
I think inflation is more like 4% so your £100,000 will be worth on £45,000 for your ungrateful little brats
Scenario 2b) — Real Investments 10%
The stock market makes more like 10% so with best case and worst case inflation your little brats will have: £240,000 or £165,000
Scenario 3) — Invest it all
If you really want to save it all for your children then if you invest it properly it will be worth £300,000 to £700,000 in 20 years.
Compound interest is the magic here
Here is what 5.5% for 20 years looks like:
thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php
So ask those little brats, do they want you to save your £65,000 and be a miserable old bugger sitting indoors in a rainy town or do they want half for you to spend on cruises and caribbean beach holidays and live longer and happier and less risk of heart disease because of it and half of them in the stock market which will probably be worth between £150,000-£250,000 by the time you die so they don’t have to cry quite so hard at your funeral.
Hope this helped. Please send to any of your rich but not investment savvy friends with children who think they are doing them a favor by sitting on their hard earned money being frugal doing their kids a favor.
And if you’re worried about stock market crashes, it never goes to zero, so have a look at this and see if any point there is a crash where you can’t just wait 2,5 or 10 years to get your money back.
If you are interested in investing seek an investment ISA such as Vanguard. I don’t advice dumping it all in the stock market either, I like the dragon portfolio which I can show you later.
