This article is intended for educational purposes only and is not legal advice. For guidance on your personal situation, please contact a lawyer.
In 2010, the San Francisco city school district started automatically enrolling kindergartners in a district-funded college savings account for low-income families, and it turns out 13 may be a lucky number for those first participants.
With compounded interest and growth, and other contributions by family members and the district through incentive programs, that original $50 stake made 13 years ago has grown to an average balance of $1,422 for the graduating class of 2023.
You don't have to live in the City by the Bay to replicate or exceed that rate of return yourself. The average student takes out $30,000 or so in loans to finance an undergraduate degree. But systematic investments can help your child or grandchild -- and you, if you co-sign -- cut into or altogether avoid that burden.
Image source: Getty Images.
Long-term investing for those 13 magic years
The stock market has historically provided the greatest returns to long-term investors, and those 13 years from kindergarten to high school easily fit what most investors would consider the long term.
And perhaps the easiest way to achieve those kinds of returns is to just ride the market without researching and choosing individual stocks yourself. For example, $25 a month invested in the S&P 500, as represented by the Vanguard S&P 500 Index Fund, over the past 13 years would have produced about $5,400.
Now, do the same with $100 a month, every month, over that same 13 years and you'd have more like $21,500. That's based on an annual average return of about 10% for that massive index fund over the past 30 years.
Certainly that's not guaranteed going forward, but history does point to its likelihood, or at least something similar to it.
Set it, forget it, and you can go your own way
The key is to faithfully make those contributions weekly or monthly or whatever works for you while you let the market do its compounding magic. I recently started doing this for my 5-year-old grandson, sending the same amount regularly to his parents, who then invest it in an S&P 500 index fund in their brokerage account.
We do this all digitally, but I could certainly make it more automatic by scheduling my contribution to them to occur on the same day and time every month.
I know my grandson's parents are busy, 30-something professionals with little interest in following the market, and they decided an index fund makes sense to them. This "set-it-and-forget-it" approach should work just fine as their little one grows into a big one in need of some higher education.
Image source: Getty Images.
Don't let time slip away for the gift that keeps giving
And if you do want to control the money yourself, there are numerous ways to manage all this besides the way we do it. You can set up a tax-advantaged 529 plan, for instance, and if you like you can include some estate planning in the mix by putting the funds in a living trust and designating them for that child's education.
The possible approaches are as numerous and diverse as the families choosing them. Advice from an experienced financial advisor and/or tax attorney can be invaluable now or later. Whatever method and amounts work for you, there's no time like the present to get started on that gift that keeps giving -- a well-funded college education.
