What Do Diapers And ETFs Have In Common?

Summary

• Providing our children a solid financial start in adulthood is important to us.
• I share how we are taking care of this with a very simple approach.
• Benefiting from the stock market, time and compounding, without stress or having to be a financial specialist.
• To have college funds of €40.000 (approx. $50.000) by the time our children turn 18.
• Without depending on massive luck or stellar returns from risky investments like Bitcoin (BTC-USD) or Gamestop (GME).

Bitcoin What do diapers and ETFs have in common?

I am very curious to the creative answers this question will trigger. Do I refer to consumer good companies (like Proctor & Gamble (PG), KimberlyClark (KMB)), Unilever (UL)) producing diapers and that are part of many ETFs (Exchange Traded Funds)? Is it about the care you should take when selecting the ones you buy? Is it that both can be bought online within a few clicks? Maybe yes, but that is not what I am referring to. The similarity lies in the time in my life when I was actively involved with them. The diapers are probably self-explanatory, the ETFs probably not......

My wife and I started buying both diapers and ETFs just before our children (Maarten, 2017 and Sophie, 2019) were born. They are both specifically meant for our children. Yes, my wife raised some serious eyebrows when I told her I was opening investment accounts for our upcoming child while she was still pregnant. She was in the meantime working through checklists of all the essential stuff you need when having your first baby. Yes, to my big surprise, opening an college fund for your children was not on any of these checklists you find in pregnancy/baby related magazines. 

Why would you do this?

My parents have been generous and wealthy enough to provide their children with a solid financial start of their adult life. By the time we graduated from University, they took care of our student debt, so we started our adult (working life) without any debt. This has helped enormously to start saving and investing substantially from the moment you start working, but also being able to afford a comfortable lifestyle.

Many other people around us have been less lucky and spent many years paying down their large student debts (some are still busy doing so, although they are approaching their 40s). I have been very lucky with that and want to provide my children the same when the time comes. In many countries the government support for higher education is being reduced and many children start their life with very serious amounts of debt. The average amount of student debt (after graduating) in the Netherlands is currently €21.000, in the US $30.000. Starting your adult life with such high amounts of debt is a real burden and hinder in important milestones like buying your first house, family planning, etc. Yes, interest rates might be low and you can take many years to pay it off, but do you really want to spent decades taking paying off this debt? What will also happen if interest rates start to rise again? You might even end up spending more on interest on this debt then the amount you originally borrowed. What a waste!

What is the goal? How much is enough?

My personal goal is to have for both of my children a college fund of almost €40.000 euro by the time they turn 18. This can be used to fund tuition fees, books (probably e-books by then, physical books are by then maybe only found in museums?). We can probably also pay off their student debt by the time they graduate and start working. We will also not have to use any of our income or other assets. This will probably be sufficient for studying at a good university in the Netherlands or somewhere abroad. Since it is also from the start labelled as specific college funds, we clearly build it separate from our other assets and it will not feel like a big sacrifice when we start spending it within a few years.

How do you get there?

As the title of this article suggest, I do this using ETFs. These are very simple but powerful tools to use the power of time and compounding interest, without hassle. An ETF is a basket of hundreds, sometimes thousands, small pieces of stocks that are listed in the stock market. It often tracks a certain stock market index (eg Dow Jones, NASDAQ, DAX), regions (eg US, Asia, Europe) or type of companies (eg Large Caps, Small Caps, specific sectors). The ETFs we use are a wide variety of global stock markets and bonds. Our college funds include for example investments in (URTH) and (EEM). By the time our children were born I had opened an investment account for each of them and initiated monthly contributions. 

It might sound boring, yes it is. Using this approach you are not depending on massive luck or stellar returns in very high risk investments like Bitcoin (BTC-USD), Gamestop (GMS), etc. With clear hindsight and a lot of luck such investments can make you rich much quicker, but you are then really depending on luck and lottery like probabilities. For such an important topic like your children's education I don't feel comfortable with that approach. With my approach you are however pretty certain of (slowly but steadily) reaching your goals.

Why did you start so early already?

The fact that I started this already by the time they were born means that you can achieve such serious amounts of capital with such modest contributions. You can see here how 100 euro per month grows in time, even when just assuming a yield of 6%. I use this yield of 6% for these ETFs, because the contributions are invested in 75% stocks (historically yielding 7% over the long run) and 25% bonds (historically yielding 4% over the long run, but recent years lower, so assuming 3% here). Putthing this together leads to an average expected yield of 6%.

Can you really turn €100 per month into €30.000 - €40.000?

Yes, just check out the following table:

With monthly contributions of €100 (€1.200 annually), 6% yield and 18 year, you end up with €38,199. This consists of €21.600 of contributions, but also €16.599 of capital appreciation. You nearly doubled your money! This is just because of starting early and using time and compounding interest do their work for you!

How are these college funds progressing?

Well, take a look yourself. Our Maarten just turned 4, but we already have a serious amount of capital on his college fund. It is not only already worth €6.150, the fund yielded 26,5% since it started 4 years ago!

Our Sophie is only 1,5 years old, but her college fund is also starting to get serious.

Especially in Maarten his fund you already see the power of time and compounding interest taking off. The green line are the contributions, the blue line the value of the investments/ETFs.

You also see that it is not just worth more than what we contributed (the blue line is above the green line), you also see that it is a stable development. This is a consequence of investing through monthly contributions, you are so called “dollar averaging”. This means that you are averaging out your purchasing prices and are far less affected by the sometimes wild fluctuations of the stock market. When the COVID19 crisis started the stock markets nose-dived strongly (which you see at the start of 2020 when the blue line briefly dropped below the green line). The portfolio was however far less fluctuating then the stock markets themselves at that moment.

Due to the monthly contributions, we simply continued buying the ETFs and were actually lowering our average purchasing price in this period.

Take-aways

We are preparing to set our children up for a good financial start of their adult life. When starting very early, you have time and the power of compounding interest working in your favour. With monthly contributions of €100 you can have a college fund of almost €40.000 by the time they turn 18. The only thing you need to do is take action to open such an account and start automatic monthly contributions. Ideally the monthly contributions are deducted from your bank account immediately after you receive your regular income/salary, so you never miss a payment. You can easily open such an account online within minutes.

Why would anyone actually not do this? Would not everyone want to achieve a solid financial start of your children’s adult life, without much effort and (financial) pain?