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| "Yeah. I have a bank account now" |
Albany has received a number of Ang Baos from well wishers such as Patrick and Ryan. Remember Ryan, the mysterious Singaporean who dropped by Perth to hand Joanna an Ang Bao for Albany?
I promised Ryan that I'll do a short write up on what I'll do with all the money I've received for Albany, including his and this is it:
I'm making Albany a millionairess
Here is the rough plan:
I will contribute $1 a day until Albany is 14 years old. That will be $5110 in total. This is a loan, not a gift and Albany will repay the loan when she is around 30 years old or so, when her investment account has gained a sizable amount so that $5110 will not put a dent to it.
Albany will take over contributing $1 a day from then on and she will be actively involved in the fund management of account with my guidance from 14 years old. No money is supposed to be withdrawn from the account at all times, she shall have a separate savings account for that purpose. By 50 years old, Albany will be a millionairess. How? $1 a day for 50 years is only $18,250 and that is nowhere near a million bucks, especially if we are gunning for 1 million in future value 50 years later, which is around 3.4 million dollars in today's value. We'll talk about that later.
First, I want to share about why I decided to do this. The aim to give her a bucketful of cash at retirement age is not to let her be a spoilt brat and so whatever she want. She needs to go to school, get a proper education, work or start her or business if she wants to and face the problems of societal life just as any of her peers. The difference is for her to live a more purposeful life instead of making ends meet.
From this plan, I want to:
1) Give Albany a chance to live a life of financial freedom that none of her family members for generations have managed to achieved. I want her to know how unimportant money is and how she can spend her time focusing on choosing her job that she has passion in and have the time to help others.
2) Let Albany realise the impact of every $1 could make when it is given enough time. Through this, I hope she will cultivate wisdom, patience, analytical skills and responsibility.
3) Allow her to see through materialism and commercialism traps that was laid out for us from our childhood to the death beds early so that she can make calculated expenditure for a more fulfilling life instead of living a enslaved life without realising it.
4) Let her know the difference between cost and value, which majority of adults today still doesn't understand.
******
Back to the plan. The rules of the game are:
1) Make regular contributions. It is not practical to actually deposit $1 a day so a regular contribution should be set up for simplicity purposes. Eg. $31 a month.
2) Invest the money and let the concept of compounding work its magic through 50-60 years.
3) Reinvest all investment earnings into the fund.
4) Never spend it.
With $1 a day contribution at a annual compounded rate of 12%, we are looking at these figures:
Note that the figures are in today's value so more have to be done if the aim is to make Albany a millionairess in future value. I'll not go into that, because that is intricate enough for me a write a whole book on it. Not that I'm learned enough to do that too, I'm learning as I go along.
There is nothing special about this. Compounding is something that everyone knows. The key for compounding to work magic is time. If you can read this article, you don't have the luxury of the kind of time we are talking about. But our children do. If you start as early as the child is born, he/she can easily afford 50 to 60 years for compounding interests to perform its magic. You wish your parents had done it for you, so if you are a parent do it for your child.
Do it for your child at no cost - as I mentioned earlier, it is a loan and not a gift. When the investment account reached 6 figures around age 30-35, you can claim back your $5110 as goodwill interest-free loan.
For a start, Bankwest has offered a child account until the child is 15 years old. They are giving a 10% interest for the special account but there is a catch - you can only deposit a maximum of $250 a month. After which, the money will be transfered to her normal account annually where the accumulated amount gets an interest of 1-4% depending on the deposited amount.
Well I am depositing $250 a month for Albany at the moment, to max out what the bank allows instead of $1 a day. I am aiming to achieve a million bucks in the future value so the extra money deposited is to counter inflation and years where I am unable to achieve a yield of 10-12%. Her first deposit include all the money that her well wishers gave in the form of Ang Baos. Well wishers, you can rest assured that I didn't not makan her money. This $250 a month is much higher than the $31 a month plan. So I hope I am giving her a good start.
For her first account, I will be able to generate $300 as interests for Albany in a year's time. The total contribution I will have to fork out will be $250 x 12 = $3000. On the 10% interests that the bank offers, that is where the $300 interests come from. Don't underestimate this small sum, it is slightly more than 1 month's worth of contribution. Over time, it adds up.
I can stick to this, doing nothing for the first 5 -10 years. Then I will have to find a better investment vehicle for that accumulated account that offers only 1-4%. Meanwhile the special 10% account will last till Albany is 15, thereafter she will be ineligible for the account. So that's where the action begins. Albany and I will be working together finding a better way to invest her money. From my calculations, we will be handling a sum of $53,120 by then, with $8,120 as compounded interests over 15 years in both accounts.
Now, I'll hand over to my wife to audit my figures. ;)
It's really great to see that you are now able to plan for the future... starting bank accounts for your kid, and so on... seems a world of difference from the day you set foot in Perth, and unsure even of a job.
ReplyDeleteKeep it going, mate!
Good on you mate! Just a thought, ever thought of buying some endowment insurance plan instead? That way you'll get some form of protection benefits as well.
ReplyDeleteCompounded interest in the bank is per month basis pro-rata. So it's actually 3141.392 (excel formula per month assuming cell A1 is 250: =A1*0.1/12+A1+250)
ReplyDeleteAssuming Albany is 2 months old and you're going for 9 years 10 months, final figure should be 101418.20. Premium put in is 44500, which gives a yield of 127.91%.
Assuming the bank honours the program all the way to the end of 15 years.
On the macro scale, the risk involved is low (easy to put in $250/mth : most plebs spend that money on smart phone subscriptions and frivilities) due to its outlay versus your net average income, and you will not be illiquid. Assuming bankwest goes under, you may not have first lien though but the sum is small enough for a 100% loss consideration (unlikely), and there are no further restrictions other than the premium put in.
If you look at global markets and their coupon (you know it as yield) offerings quite often you don't get 10% (what about the greek 10 year bonds at 29%?) without worrying about recovery rate. It'll be nice to have 100K even 15 years down the road, as a teenager, imho.
Thanks for this article. This is inspiration for me to start saving for my kid. You daughter is really lucky.
ReplyDeleteI checked out the Bankwest, and it states that the 10% interest is only for account with under $5000 balance. Any idea what the rate is after that?
Cheers!
after that is 1-4%, (depending on sum) if i remember correctly.
Deletehttp://www.bankwest.com.au/library/pdf/PDS_20060615-172046.pdf
ReplyDeleteI apologize if I did not read the fine print of it. Therefore my previous post and calculations should be binned.
The annual sweep facility caps each year's return to a fixed 10%, and not compounded. As such at the end of 4-5 years the yield is no different (4+%) from normal savings accounts and thus too good to be true.
i didn't explain it well enough. Yes, there is no compounding on that 10% but the straight line interest is already quite good. it's nowhere near the 12% compounding year on year i needed that's why i am saving more than $1 a day for her to make up for it.
DeleteSounds like a great plan, all the best to you! =)
ReplyDelete~ Joelyn Alexandra
All the best, -asingaporeanson-, on Albany's lifelong savings plan!
ReplyDeleteAlthough we know that life with its surprising twists and turns would probably change the plan oh-goodness how-many-times, somehow somewhere out there I believe you're already being rewarded for your bold vision! :-)
whatever the interest is, it is still better than Singapoer banks' rate!!!
ReplyDeleteFD @ 1.88% as if it was very very high!! duh...
good, not like us,,we are so ke lian, we wont want our future kids to be like us.
ReplyDeleteah pooh
What a great plan for Albany :) What a great daddy you are, thinking of and for her future.
ReplyDeleteI notice in your 2nd photo: the envelope by Ryan had, at the bottom, Numbers 6:24-26.
Numbers 6:24-26
24 “‘“The LORD bless you
and keep you;
25 the LORD make his face shine on you
and be gracious to you;
26 the LORD turn his face toward you
and give you peace.”’
He meant it for you, Jen, and Albany. God bless your family :)