Personal Finance

3 Ways to Make Your Kids Millionaires

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Eileen and Gerard Connolly had one income and two daughters in private colleges for seven consecutive years. When they were on the homestretch of paying for college tuition, they realized they needed to start catching up on their own retirement savings. But they also wanted to help get their daughters off to a good start.

The Connollys were intrigued by Dividend Reinvestment Plans, or DRIPs, which are stocks that pay dividends that are automatically reinvested to buy more stock, and Eileen had a little experience with that approach. She held three shares in Johnson & Johnson, left over from a period when she was employed by them, and the value was growing.

So the couple bought one share in four companies for each daughter: Coca-Cola, IBM, Johnson & Johnson and Kellogg’s. All dividends were automatically reinvested, and when they could, the couple would put in additional money, usually between $10 and $50 at a time. Over time each portfolio grew to include 15 stocks, “all in companies where we knew what they did,” says Eileen.

The couple stopped investing for their daughters when grandchildren started coming along. But the small amounts they invested when they could over a period of seven years now adds up to about $35,000 for each of the girls, and continues to grow.

And now the Connollys have bought each of their five grandchildren a share in those same four companies. They stand to accumulate even more than their mothers because their investments will have more time to grow. Contributions to these accounts are now a standard gift from their grandparents. “We decided we’re not buying a lot of toys anymore,” says Eileen. “They have plenty of toys.”

As for those three shares of Johnson & Johnson that Eileen held onto? Thanks to dividend reinvestments and stock splits she now has 400 shares worth about $40,000.

1. Start Early, With What You Can

The strategy the Connollys used is simple: Buy a share of a company and add to it regularly, even in small amounts. When dividends are paid, have them automatically reinvested to purchase more stock.

“An investment of $25 a month, in just one company ($300/year) can grow to nearly $1.5 million over the 62 years until (your child or grandchild) reaches retirement age,” explains the DirectInvesting.com website founded by Vita Nelson, who for years published a newsletter that inspired the Connollys to invest in DRIPs. (That example is based on an annual rate of return of 10%, the growth rate–including dividends–of the market in general over the long term, according to Ibbotson Associates, a Chicago-based research firm. )

Another compelling example on her site: Simply invest $2,500 a year for two years for your progeny when they are age five and six. Let the money continue to grow and, at a 10% annual rate of return, at age 65 the account will be worth almost $1.6 million! You can try DirectInvesting.com’s DRIP Growth Calculator to see how much the amount you can afford to invest can grow over time. Ideally, use it with your kids or grandkids so they can get excited about it as well.

“They can end up being ahead of their parents,” says Nelson, who has also started accounts for her grandchildren, though she invests through her MP 63 Fund (DRIPX), which is a mutual fund based on an index of companies that offer dividend reinvestment plans.

Of course, investors need to understand that even the stock of well-known companies that regularly pay dividends may fluctuate in value. (But that also makes a case for investing regularly: you buy shares when the price is lower as well as when it is rising.)

2. Help Them Develop a Saving Habit

“From my perspective, the No. 1 habit a parent should teach a child related to money is to save,” says Sam X Renick, who develops music and books for kids centered around a character named Sammy Rabbit. “It has several benefits. Here are just a few:

It teaches discipline, delayed gratification and thinking about the long run.

It helps create an asset-building mindset and pattern for kids, placing them on the path to prosperity. It also helps them associate money with something other than spending.

Saving helps with goal-setting, which also helps with building confidence and esteem. If you want to be rich you better learn to set goals.

Saving is something any kid can do — actively participate and have a stake in. Take a portion of that chocolate, chips, churros, soda and french fry money and put it into a savings or investment account.

Saving and investing regularly send a child (or adult) a strong message — they are important; they have a future worth saving and investing in; they have a future worth protecting!

Renick points to a study, ‘Habit Formation and Learning in Young Children’, authored by behavior experts at Cambridge University, that found that kids form financial habits prior to age 7 that will stay with them as adults. And another study, The Thirty Million Word Gap, out of Rice University, indicates the language people use (or don’t use) in their homes is crucial to children’s expectations and outcomes.

“So if a parent doesn’t talk about the importance of saving, investing, asset building, etc., why should a child think it is important or (have) that expectation?” Renick asks.

3. Make Saving & Investing Fun

If the idea of trying to teach your kids to save and invest sounds about as much fun as trying to get them to eat their five servings of vegetables every day, don’t be discouraged. There are more ways than ever to deliver the message without seeing your kids roll their eyes in response.

Take the prospect of getting them started in the stock market, for example. One of the advantages of buying individual stock, says Nelson, is that you can buy stock in companies that make the things your kids know and love. “Then when they have a choice about which products to buy, they can support those companies as well. They can decide to drink Dr Pepper or Snapple because they own shares in the Dr Pepper Snapple Group,” she notes.

In addition, there are lots of books and games you can use to help get important concepts across to your kids, such as the online games Disney’s Great Piggybank Adventure and Planet Orange. You can even buy a tricked-out piggybank designed to teach kids how to save and invest.

My daughter’s attitude toward saving money changed dramatically at around age 4 when she listened to the Sammy Rabbit music CDs and we read the accompanying books together. She’s now a teenager and extremely careful about her spending. (Yes, I love that rabbit!) Free music and workbooks about saving money (including karaoke versions of all songs) is available on the SammySongClub.com website.

And, of course, it’s also a good idea to introduce kids to the concept of credit, particularly building credit, as building and using credit responsibly can save you a lot of money over time. If your kids are under 18, they typically would not have a credit report — so you can show them how you check your credit reports and your credit scores (which you can do for free at Credit.com), and let them know how a good credit standing is part of a healthy financial profile.

Additionally, the Jump$tart Coalition maintains a database of financial education resources, many of which are free. With so many good resources, it’s not a matter of whether you can help teach your kids or grandkids to be financially successful: It’s a matter of how and when you get started.

Now would be a good time.

More Money-Saving Reads:

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