Money Tip
Parental Insanity and College Savings

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By Bob Bobala (TMF Bobala)
June 25, 2002

One could argue that it takes a certain amount of temporary insanity to have children to begin with, but parents these days appear to get even more delusional when it comes time to start saving for their children's college education.

A recent poll sponsored by AEGON Institutional Markets Inc. found that parents saving for college expect to earn returns of 19% per year. Nineteen percent! (And that was down from last year's expectations of 24%!)

Let's get back to reality. Despite the long bull market that ended in 2000, stocks historically have returned about 10%. Since March 2000, the S&P 500 has declined more than 23%, the Nasdaq has tanked 68%, and the Dow has risen a scant 0.36%.

Despite the market's decline, stock prices in relation to earnings are still historically high. No less an authority than Warren Buffett has repeatedly sent out warnings that investors shouldn't expect more than 6% to 8% returns. At the Berkshire Hathaway annual meeting in May he said, "We think people whose expectations were set from 1982 to 1999 will be disappointed [with future investment returns]. But there's nothing wrong with earning 6% annually on your money in a world of low inflation."

Don't despair, though. Yes, saving for college can be daunting: According to financial software company 401kid, by the year 2020 it will cost $260,000 to send your child to a four-year private college. But there are some great savings vehicles available to you. Start with your state-sponsored 529 plan or the Coverdell ESA for tax advantages. Have no idea what we're talking about? Get thee to our College Savings Center ASAP.

Whatever you do, don't make the mistake of simply putting your kid's college money in a bank savings account -- something 61% of parents are, unfortunately, doing. Not only will you have no chance of making 19%, you probably won't even manage 3% at current interest rates.

The best advice: Don't put this off. Time is your greatest asset. The sooner you can start putting money away, the more you can take advantage of the power of compounding returns. Isn't Junior's future worth the pain of a little financial planning now? Well, then snap to it! If you'd like personal help, you can get it through TMF Money Advisor.

Bob Bobala doesn't own any of the stocks, savings accounts, college accounts, kids, or Warren Buffetts mentioned in this article. The Motley Fool is investors writing for investors.