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The Early Investor Gets the Goods
Jeff demonstrates the benefits of planning early, whether you're saving for a grandchild's education or for your own retirement.
Dear Jeff:
I have a new granddaughter, and I would like to start a college fund. How should I do it? I read that it should not be in her name because it will be considered income for her and would hamper getting loans and grants. Should I start some kind of mutual fund or obtain an insurance policy? What is your advice? She is 9 months old and we have a limited income.
Jeff Says:
You are very wise to start saving for your granddaughter's college now while she is only 9 months old. Recent studies show that college costs are rising at the incredible rate of 7 to 8 percent per year!
The numbers are staggering when we look at a real-life scenario such as your granddaughter's. First, let's look at the cost for someone entering college today with the annual cost for the college of her choice at $10,000. If we inflate this amount by 7 percent a year, this would mean that in 17 years -- when your granddaughter would actually attend -- the cost for the same education would be over $31,000 per year for a total education cost of over $120,000! Shocking, isn't it?
Here's the good news: You are starting now. The power of time and compounding can work to your benefit. Begin investing now and earn 9 percent, and you could completely pay for your granddaughter's education with a savings amount of $250 per month. Wait five years and it will require monthly contributions of over $460. Wait 10 years and you will have to save over $1,000 per month to accomplish your funding goal.
Don't fret if $250 is still too much for your limited budget. You don't have to save for the entire amount. She could get grants, loans and scholarships -- and participate in work-study programs. I understand your concern, because your granddaughter's ability to acquire this alternative funding may be seriously hampered by assets that she owns at the time she applies for it. Financial aid providers usually require that a student provide a larger percentage of their own assets toward their education. As far as the type of investment, mutual funds give you a wide variety to choose from and would be a great place to start.
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