The Million Dollar Baby program promises so many perks for a child and certainly looks too good to be true at a first sight. Just glance at this list:
Down payment on a home
Starting a business
and it comes with a lifetime protection against adversities:
Creditors and bankruptcies
Health and illness issues
What is the catch, people ask, is it all too good to be true? Well, there are a few ‘catches‘. Review them and decide for yourself if these would stop you from investing in your child future.
Catch 1: You need to invest early
The mind-blowing growth of the money invested in the program could only be achieved by the exponential power of compounding interest over a longer period of time. Albert Einstein called it 8th wonder of the world:
Invest as early as possible and let the money grow over a longer period of time is the catch. There is no magic here, just a knowledge of how money works and a responsibility to act on behalf of your children while they cant.
Catch 2: You need to give up some gains to eliminate losses
Do you know if the market goes down 50%, it needs to gain 100% for you to recoup losses?
Do you know if you invested $100 in a market which goes 10% up, then 20% down then 10% up again to the average of 0%, you end up with $96.8 and possible tax obligations? Does not seem like a true zero, doesn’t it?
It takes years to rebuild in case of a downturn, the years that destroy the power of compound interest. What if there are few downturns down the road? The expected returns will never be achieved if time lost due to downturns. To fully exercise the power of compound interest you should do exactly what Warren Buffett says: never lose money.
In order to protect your money from losses and market downturns, you have to give up some gains. So if the market goes up 17%, your money would grow by ‘only‘ 15% is a catch. This is the price absolutely worth paying for the guaranteed protection of your wealth! If the market goes down 20%, your money guaranteed to stay where they are.
Catch 3: There are initial withdrawal limitations
Because money invested in growth vehicles that guarantee no losses, the money placed strategically and part of it ‘locked’ in the first 7 years of the program. During that time, you will have access to approximately 65% of the invested amounts and should only consider this as a true emergency fund. This limitation is usually the one which raises a customer’s eyebrow. In our instant world, people expect instant results. We are sorry to disappoint you, there are no instant results here. You get an instant protection but not an instant growth. Million Dollar Baby is a lifetime program for your child which is based on the compound interest and needs time. Look how Warren Buffet built his wealth over the time. This is the pattern you are setting your child for:
Do you truly love your child and his future more than a money you are spending today?
Do any of these “catches” outweigh a future financial freedom of your child?
Are you bold enough to take the first step to your child financial independence on his behalf?
Don’t wait - every year of procrastination takes away from the compound interest!
Wallio: from Wallet to Portfolio