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LESSON 2: TIMING IS EVERYTHING
Saving For College
For
the past ten years the average cost of college tuition and fees has risen
nationally at the rate of about 5% per year, consistently outpacing the
rate of overall inflation. Given these numbers the average cost for a
child entering college in 18 years may be as much as $85,000.000 for a
four-year public institution and more than $200,000.00 for a four-year
private institution.
The example above demonstrates just how important it is to save, not just for college but also any other want that you may have. Using the college example however, you can see that in order to attain the dollar levels that may be required you must begin a savings program as early as possible. This entire lesson clearly demonstrates that "Timing is Everything". The magic of simple compound interest can help you dramatically attain your goals.
Many states have begun tax-deferred college investment plans. They are simple to set up and offer many advantages. Tax-deferment until the time of distribution, plus the power of compounding interest results in your account growing much faster and larger than a taxable savings plan.
By investing even a small amount on a regular basis, you can accumulate a significant amount for your college fund.
| Monthly Investment | 5 Years | 10 Years | 15 Years | 20 Years |
| $50.00 | $3,467 | $9,006 | $16,880 | $28,450 |
| $100.00 | $7,294 | $18,012 | $33,761 | $56,900 |
| $300.00 | $21,883 | $54,037 | $101,282 | $170,700 |
The example above illustrates the future hypothetical value of different regular monthly investments for different periods of time and assumes an annual investment return of 8%.
This lesson and the above college savings example demonstrate just how quickly your money can grow. As we know, income after taxes can be used for two purpose: spending and saving. When considering just how you will spend your available funds please keep in mind the opportunity cost associated with that spending choice and its overall impact on the future.
Many young people don't think they have enough income to save. As a result, they postpone a regular saving program. How can this decision be costly in the long run?
Remember:
- The amount saved is not as important as saving on a regular basis!!
- The more time you have to save, the more savings you will have at the end of the time period.
- The more income you choose to save, the more savings you will have at the end of the time period.
- The higher the interest rate the more savings you will have at the end of the time period.
