Parents always want to see their children succeed, and a good education can give your son or daughter a leg up when it comes to competing in today's dog-eat-dog job market. But in order to get that education, too many students overextend themselves with debt, digging themselves into a hole from which it can be difficult or impossible to escape. Fortunately, there's a way you can build up your finances to provide the funds necessary to help your kids avoid a college-related financial crisis of their own when they graduate as young adults.
Admittedly, being able to afford college might seem impossible to some. After all, tuition has gone up at a faster rate than inflation for years, with the typical private four-year school now charging about $30,000 per year in tuition and fees, according to the College Board. However, just by using a simple but powerful investing method, you'll be able to make one more invaluable gift to your kids, leaving both them and you in a better financial position.
The cost and benefit of college
Mothers and fathers know how much harder it is to afford college than it was in the past. Tuition rates have climbed at an alarming rate, and even if you take steps to try to contain your costs, it can still take a huge chunk out of the typical family's budget. When you add in housing, meals, books, supplies, and other added costs, the typical student at a private college will pay almost $45,000 a year.
Even those who look to economize by staying with an in-state public college can expect to pay almost $23,000 for college-related expenses. For a family with two kids, total costs of $200,000 to $350,000 are commonplace -- and the typical financial aid package now includes far more student loans, and far less in outright grants and gifts, than in the past.
At the same time, though, the value of a college education is also substantial. Research shows that, among those aged 25 to 32, college graduates earn more than 60% more than those who didn't attend college.
Those who finish college are also much more likely to find gainful employment and to avoid falling into poverty. Despite some opportunities for those without a college education, a bachelor's degree is gradually becoming the price of admission for many occupations.
Because college is so important, many families pay whatever they have to in order to finance an education. As a result, many students and parents take out student-loan debt, and in recent years, outstanding loan balances have become even scarier than in the past. One survey showed that among those who graduated in 2012, more than 70% had a loan balance outstanding, with the typical balance amounting to almost $30,000.
Despite numerous programs designed to allow for interest forbearance or outright loan forgiveness, that amount of debt can take years to pay down, forcing new graduates to make tough financial choices in the interim. To help take some of the burden off their kids, many mothers and fathers take out loans of their own; but those student loans create new problems for those trying to save for their own retirement and other financial needs.
The better way to finance your children's education
Putting yourself into debt is far from the ideal solution to putting your kids through college. But most people struggle to come up with any other way to raise six-figure sums for their kids. What they don't realize is that an investment strategy that takes full advantage of the power of compounding can put time on your side and make even lofty goals achievable in the long run. By making investments that produce growth and reinvesting the income they generate, you can build up wealth more quickly than you'd ever think possible.
Compound interest is easy to understand. The idea is that, by letting income accumulate, you make the money work for you, and the more time passes, the greater the impact. For example, if you put $100 aside every month for college savings and invest it in an investment vehicle that produces 5% annual returns, you'll have almost $35,000 after 18 years. That includes $21,600 in money that you contributed, plus another $13,400 or so in income from your investments.
The greater the return on your investments, the faster compounding will work in your favor. Earn 10% returns on your investments, for instance, and that $100 per month will produce $60,000 at the end of 18 years. That's enough to cover more than a year's worth of private college education and related expenses.
If all you want are market returns, then finding ways to invest isn't hard. A number of so-called college savings plans, or 529 plans, allow college savers to put money aside for their kids on a tax-deferred basis. Just like the retirement plans that many employers offer to their workers, a 529 plan has a select slate of investment options, most of which are mutual funds. Using low-cost index funds can give you average market returns that approach that 10% figure.
But if you have loftier goals, then settling for that long-term stock market average won't be sufficient. To beat the market averages, your best option is to find stocks that have the potential for truly extraordinary returns.
Why you should take the extra step
Even small gains in returns can have a huge difference in the final result. For instance, take the same $100 monthly savings amount that we discussed above. Instead of accepting the stock market's 10% average return, say you find a stock that can produce returns of 12% year in and year out. After 18 years, you'd have more than $75,000 -- or $15,000 more than you'd get with 10% gains.
Find even stronger-performing stocks, and you'll be able to do even more for your kids. With an average annual return of 20%, those $100 monthly savings amounts will leave you with $207,000 after 18 years -- enough to finance an entire four-year education.
If it were easy to find those stocks, however, then everyone would be doing it. There's a lot at risk. If you pick the wrong stocks, then your kids will be stuck with big loans hanging over them. Pick winning stocks, though, and you'll take that entire loan burden off their shoulders.
Find the stocks to let you help your kids
Motley Fool co-founders Tom and David Gardner have helped thousands of mothers and fathers invest better on their children's behalf, and their flagship Motley Fool Stock Advisor service has put together a portfolio of strong-performing stocks that have produced exactly the market-beating returns you need to make the most of your savings. David and Tom have spent more than a decade discovering some of the highest-returning stocks in the market.
Many of those discoveries have special relevance for kids. For instance, the Gardners discovered Marvel Entertainment, the well-known producer of superhero movies that was later bought out by Walt Disney (NYSE:DIS) and has given shareholders an almost 4,100% return since mid-2002. Netflix (NASDAQ:NFLX) has taken the home-entertainment market by storm with its video-streaming service, and investors have enjoyed gains of 3,350% since late 2004. And for any family that has ever taken a vacation, priceline.com (NASDAQ:BKNG) has made huge profits opening doors for cost-conscious travelers, and investors have enjoyed gains of more than 4,300% since mid-2004.
Tom and David have seen the power of compounding in action, and their members have countless stories of how their riches have enhanced their lives and those of their loved ones. Along the way, you can use their investing savvy to teach your children about the power of compounding and investing, putting them in an even better position to teach their children and grandchildren about how to find great stocks and ride their long-term gains to build their family's financial future.
Many mothers and fathers don't have the financial wherewithal to put their kids through college without debt. But by using the power of compound returns with your investments -- and by taking advantage of the advice offered in Motley Fool Stock Advisor -- you could keep your sons and daughters from ever having to face the financial crisis that student debt can create.