Throughout history, college has been viewed as one the best ways to progress in life. In fact, college graduates often make more than their non-college educated counterparts. While college isn’t a 100% guarantee of success, it has been shown to drastically improve chances.
College education costs on average have risen 8% each year, doubling every 9 years, according to finaid.org. This means that a newborn child’s college education costs would be double that in their birth year by the time they turn 18.
The previous statistic highlights the importance of saving for a college education. A 529 plan is a specific investment tool designed for educational expenses such as private school tuition and higher education.
A 529 plan differs from a traditional savings account, because the money can be invested in the stock market, allowing the money to potentially grow faster.
Note that the “interest rate” on step three of the models below is actually the “rate of return” since this is investing rather than saving.
529 Plan – At Birth
If you invested $1000 at the child’s birth, contributed $100 each month for 18 years and earned an 8% return on the balance every year…
You would have nearly $50,000 saved to finance the child’s college education, having contributed just $22,500 — a gain of $27,500 over 18 years.
THE POWER OF INVESTING!
529 Plan – 10 Years Old
If you invested $1000 at the child’s birth, contributed $100 each month for 8 years and earned an 8% return on the balance every year…
You would have nearly $15,000 saved to finance the child’s college education, much less than if you invested earlier.
The two scenarios emphasize the importance of having time in the markets, rather than timing the market for the best entry price. By investing when the child is a newborn, you would have almost $50,000 saved. Contrast that to investing when the child is ten years old, you would have around $15,000 saved — a difference of $35,000!
You can model the scenarios above by using a compound interest calculator. Compound interest is the money that your money makes and it is one of the most powerful tools in finance.