By Team Tomorrow
Published September 13, 2021
Save for college the same way you should save for retirement: by letting your money make more money for you.
There are many ways for parents and grandparents to invest in a college education. One common theme among most college plans is compounding interest. If you start early and make smart investments, your total interest can even exceed your total contributions.
Here’s what we mean:
Mila recently gave birth to her daughter, Ella. A couple months, a few spit ups, and 1,000 changed diapers later, Mila and her husband, Isaac, decide to start investing $7 a day to save for college. Since investing $7 each day is maintenance, they instead decide on investing $210/month, or $7 a day for 30 days. The fund they’re investing in has an interest return rate of 8%.
This is what happens after 18 years:
|After 18 Years||$100,818.09|
After 18 years, your monthly contribution swells to over $100k! All that comes from a total contribution of only $45,360. The only $55,458 is accumulated interest.
If you invest in an account that doesn’t tax education-related expenses (like a 529 account), that full amount can also be tax-free!
$7 a day is a significant chunk of change. That can be the price of an entire family phone plan, a decent portion of a food budget, someone’s entire monthly “going out” budget.
You don’t have to be married to saving $7 a day. Instead, you can do $100 a month, or contribute a portion of your tax returns, your bonus, or your raise.
Contributing $1,000 a year with the same metrics gives you an end balance of $41,761.94.
$41,762 is more than a full year at private school for the 2020-2021 academic year, and close to the cost of four years of in-state public school tuition. Also, that doesn’t include any financial aid, grants, or scholarships your child may qualify for. Not bad, a total contribution of $18,000.
The market is unpredictable. Stocks have been steadily improving since 2008, but crashes are inevitable. How well your portfolio depends on your level of risk, when you buy, and what you choose to buy.
The S&P 500 index, one of the most quoted and influential stock market benchmarks, has ushered varying returns over the years. The long-term return rate of the market, as measured by the S&P 500 index from 1957-2018, is 7.96%, almost the same return rate as Mila and Isaac’s.
Money.com has a formula for how much to save:
Spreading this cost over time makes college investing more manageable.
And don’t forget: $7 a day goes a long way.
For more tips and tricks on how to save for college, check out some of our other posts. Also, one of the best ways to save is with a permanent life insurance policy. They’re income tax-free, flexible, and don’t impact federal financial aid.
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