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!