Invest your money at 7% a year and in 10 years' time, you'll have doubled your money. The flip side to that is if an expense keeps rising at 7% a year, after a decade it will cost twice as much as it does now.
Welcome to the world of college tuition! OK, it's not that bad. The cost of four years of education is rising only 6% annually. That means if Junior is 5 years old now, the average annual cost of tuition, room, and board at a private college -- currently estimated by the College Board to exceed $35,000 -- will set you back more than $70,000 by the time he's ready to go. And public college costs, still much cheaper than private schools, are rising at a fair clip.
With luck, you've got that much time to invest -- and long-term stock investing is your best way to go.
When it pays to be average
Stocks have historically appreciated at around 10.5% a year, meaning you could triple your money in that 12-year span just by earning market averages. Starting with $20,000 and not adding another dime, you can amass more than $66,000 -- almost enough to pay for that first year at a private college.
Of course, markets rise and fall, and hardly do they ever return exactly 10.5% in any given year, but with a long enough time horizon -- figure five or more years -- you should consider investing.
How do you earn what the market makes? Easy. Invest in an index mutual fund like Vanguard Total Stock Market (FUND:VTSMX). It tracks some 5,000 stocks that give low-cost diversity across industries and company size, while reducing the volatility you'd experience by investing in individual stocks.
Adding in a few top-notch actively managed funds can potentially juice your portfolio's returns without additional risk. The right funds can give you the peace of mind of knowing that you're getting the investing acumen of the industry's best managers.
If you don't know where to turn to invest your nest egg, consider the helping hand you can receive at Motley Fool Champion Funds, which recommends the best mutual funds to subscribers every month.
Time is on your side
What if you don't have $20,000 to plunk down in the market today? Well, you don't need that much. While you should save as much as you can afford, a more practical goal for most people is to try to save half the cost of tuition. And that can be done for a fraction of $20,000.
Start by investing just $100 a month. Try to increase that amount, but if you can't, you'll still realize almost $29,000 by the time Junior graduates high school. You'll end up with almost the same result as if you had started with the larger nest egg. That's the power of saving regularly.
Any difference can be made up through scholarships, grants, and loans, as well as Junior's part-time summer job or a work-study program at school. It's not an insurmountable hurdle.
Invest locally
Remember those local colleges? They often offer discounted rates for state residents or even free tuition! For example, Delaware's SEED (Student Excellence Equals Degree) scholarship offers a free associates degree for "Delaware students who stay in school, work hard, and stay out of trouble." Other states offer similar programs.
One of the best places you can invest for college is in a 529 savings plan. Named for a section of the IRS tax code, 529 plans are state-sponsored and -operated investment plans that give families a tax-free way to save money for college. Every state has them. Some of the benefits of 529 plans include:
- Federal tax exemption on earnings and withdrawals, as long as they go to college expenses
- Generous maximum contribution allowances, some as high as $250,000 per beneficiary
- Grandparents can make contributions to plans and enjoy certain tax benefits as well.
There's a lot more to learn about 529 plans, and a good place to start is at the Motley Fool's College Savings Center. There you'll find out about not only 529s but also Coverdell Education Savings Accounts, the old Education IRA.
A Foolish thought
The earlier you start saving for college, the better the chances are you'll have sufficient resources so Junior won't be indebted up to his varsity letter by the time he graduates.
