Consider baby "John Doe". John's father starts doing some overtime (or a second job) as soon as he finds out John is on the way. When John is born he manages to scrape together $12,000 to invest in a low-cost investment fund. If the fund's total return averages 11% pa, the child's investment returns are taxed at 25%, and inflation averages 2% pa, the real, after-tax, return of the investment would be 7% -- and the investment account will hold just over $1 million (in today's dollars) when baby John turns 65.
Of course very few expectant parents would have a "spare" $12,000 lying around when a baby arrives, few dads would go out and earn an extra $12,000 during the pregnancy, and, if they had the choice, most people would probably put the $12,000 towards baby expenses rather than invest it for 65 years -- but it does show what can be achieved with a fairly modest amount invested for a long period.
If a lump sum of $12,000 is beyond reach (after all, that would require putting aside $33 a day for a year), the same result can be achieved by investing $1,000 each year for ten years (ie. finding an extra $3 a day to invest for the child), provided the investment return is somewhat higher (13% instead of 11%) or if the money was invested in a tax-sheltered account (such as a child superannuation account).
If one did both - investing an initial lump sum of $12,000 and then adding a further $1,000 each year until John Doe turned ten, John's investment would reach $1 million (in today's money) by age 58.
Copyright Enough Wealth 2007