My son will be a millionaire by the time he retires. I know it!

Are these the words of a blindly proud mamma, convinced her boy is going to be a brain surgeon or the next Richard Branson?

Nope.

Are we a trust fund family? Already rich and passing on the family moulah?

Nope.

Am I a mega bucks entrepreneur, raking it in and racking it up?

Nope.

Well not just yet anyway… No, I know my son will be a millionaire because I started his pension when he was three years old. What’s remarkable is how relatively little I have to put away to ensure his financial security.

Just £35 a month of my own and for a few years I put in our child benefit payments.

It’s amazing isn’t it? Sometimes in my leaner months (I’m a freelancer), I begrudge those chunks leaving my account but it comes out the day I get paid and mostly I don’t even know it’s gone. It’s the equivalent of the cost of less than two of my daily commutes into work and back, it’s that small. (Actually my commute is humungously expensive!)

This relatively small amount will turn into a ginormous wodge because of one simple process: compounding. And I wish someone had taught me about this when I was in my twenties because even then I could probably have found £30 a month to put away if I’d known about this simple but magical financial process.

For those that don’t already know, here is a brief explanation of what compounding is:

The magic of compounding

Simply put, compounding is what happens when your money grows and gets reinvested. You put money into an investment, it makes a profit, and then your original money plus the extra bit on top gets re-invested and makes a bigger profit because there’s a bigger investment. Over time the amount grows bigger and bigger as your contribution and the profit you make gets invested.

Compounding happens when you save money in a savings account too – the money you make from saving i.e. the interest, makes the original pot of cash bigger and so each time interest is added, it’s a little more interest than before.

How I know my son will be a millionaire

My son’s pension is invested in funds in the UK and worldwide – not through any product that requires detailed knowledge of stocks and shares – just through a Virgin kid’s pension. At the time I started it there weren’t too many around, and it may not be the best value out there, but I can review the market and move it at any time.*

(*Since my first draft of this article, I have now moved the pension to a Self Invested Pension PlN (SIPP) with Hargreaves Lansdown and I will be putting it into funds that track the stock market, which should lead to an average of 7% return all being well).

Here’s how his money will grow as things stand.

My son’s journey to being a millionaire

I plugged in the numbers to the pension calculator on the Interactive Investor website (http://www.iii.co.uk/sipp/pension-calculator).

The figures are based on me squirrelling away our child benefit (£80pm) until he was 5 and thereafter just putting in £35 per month.

How I know my son will be a millionaire

So there you go! Hopefully I will get taken out for lunch when I am one hundred and two years old!

OBVIOUSLY, there are many caveats to this plan. The biggie is that this pension calculator doesn’t take into account inflation. So although the fund may have over £1,000,000 in when my son retires, it won’t be worth anything like that amount would be today.

But it does still sound good though!

The other caveat to this plan is that the pension may not make a 7% return over the years. Generally speaking that’s about the return you can hope to get from tracking the stock market, but there are no guarantees and average performance can be lower than expected.

The extra blurb the website cited in how they calculated the sums can be found when you do your own calculation. The main reason for using this particular calculator was because not many will let you input an age as low as 5 – most require the pension to be for someone 18 and over.

It’s never too late to take advantage of compounding

Sadly for most of us, we didn’t start our pension aged three. I started mine in my late twenties and put aside only the bare minimum. I didn’t realise that the more I could put by, the quicker my money would grow, so for years I was just putting in £50 a month.

Now, aged 42, I put in £400 a month and the UK government add another £100 making it £500 pm. It’s still not enough, but I plan to put in more next year. I would like my pension pot to be £500,000 when I am 60. At the moment the next milestone to aim for is hitting £100,000 which I am hoping to do early next year.

Compounding works for everyone. The results are most magical over the very long term, but remarkable growth can still be seen over ten years. The key is to start putting aside something – anything – now.

Even if you are fifty years old and have not started a pension yet, or a savings account. Do it today.

Don’t wait til after you’ve fitted a new kitchen, moved house, had kids. Do them AND start saving! Start small. Work out what you’d like to have to fall back on when it’s time to start using your pension/savings and then do a pension calculator to work out what you need to save.

Would you start a pension for your kids?

According the the HMRC, 60,000 kids in the UK have a pension set up for them. Even if you can’t afford to put away their child benefit or pay into it for years on end, anything invested now will have decades to grow and build up a nice pot for them when they are much older.

So would you do it?

And a question for you parents out there: Do you think I should tell my son about his pension? Is it a good financial lesson to find out about how compounding is working for him? Or will the knowledge of his pension stop him from working hard when he is younger? Comment below.

How I know my son will be a millionaire