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Sunday, June 22, 2008

Saving vs Investing for College

I am considering changing the "Worst Financial Decision" portion of my NetworthIQ profile. Since my 18 year old is getting ready to begin college in the fall, I've looked back on my college savings plan with some regret. Yes, I did open a 529 plan and contribute along the way, but I anchored my plan with a regular purchase of Government EE Savings Bonds.

I justified this "investment" by thinking that the interest on the bonds was tax free when used for college, that the money could double as my emergency fund, and finally by believing that Savings Bonds were somehow a civic responsibility.

Well, if you run the numbers you'll see that this decision has had a much bigger impact on my financial life than the decision to purchase a new car ABOVE the dealer's sticker price when I was 22 years old.

Beginning in 1991 I've purchased a bond for $50 each month. Over the years, these bonds have earned an average of 4.5% and currently have a value of $15000.

If I had instead purchased a S&P Index fund, I would have earned an average of 10% and the account value would be over $25,000. The proceeds would be taxable, but at the 15% rate. I'd still be up more than $8500.

In the end this is a great example of savings vs investing. Buying CDs, savings bonds, or money market mutual funds are all examples of saving. Equity index fund investments get the most out of every dollar, and over time, have made real gains where savings have barely kept up with inflation.

I'll finance most of my sons college expenses with cash flow from work, but this effort would have had a lot less pain if I had invested more aggressively in the 1990s!

2 comments:

Jonah Keegan said...

If you're looking for help whether investing or saving for college, try Freshman Fund. I am one of the company's founders.

Freshman Fund is a college savings gift registry that lets friends and family gift directly into your child’s college fund. I hope you'll try it and please let us know what you think. Cheers!

Savings Bong Calculator said...

Do you know the easiest way to calculate your return is by using a Savings Bond Calculator? Yes, they are many good ones available online. You do not have to go through all complicated formulas in order to calculate your yield. By simply entering Denomination , Series Numbers, Face Value of the Bond and the Issued Date of the bond you will be able to get what you will get as return.