CollegeAdvantage welcomes the following guest blog from John Hupalo, Founder and CEO of Invite Education, a company dedicated to providing the information, tools and services families need to effectively plan and pay for college.
It’s time to turn up your college savings strategy using a classic financial literacy concept: The Rule of 70. By taking a look at big picture goals, this rule of thumb can help you keep your eyes on the long-term prize — achieving your family’s college dreams.
Here’s how college savings can grow: Without a calculator, you can easily estimate the number of years it will take for money to double based on the rate of return.
Take the number 70 and divide it by a growth rate. Let’s use 7% as an example.
70 divided by 7 equals 10. This means that at a 7% growth rate, it would take 10 years for the investment to double. Using the same calculation and a 4% growth rate, an investment would double in 17.5 years.
The power of compounding interest works for you: The Rule of 70 is a powerful tool to help you understand the importance of starting a college savings plan as soon as possible. The early years of your child’s life actually represent the greatest opportunity to begin saving so that compound interest will work in your favor. But with so much happening in life, along with other expenses, savings can fall to the wayside. Don’t let this opportunity pass by in those early years. You’ll thank yourself later.
Some practical examples: Ultimately, you want to give enough time for investments to compound and hopefully double leading up to the first day of college. The Rule of 70 obviously cannot predict the future performance of investments, but rather it’s a rule of thumb to help guide your savings horizon.
Let’s say at your child’s first birthday, you invested $1,000 that turns out to earn 5 percent annually. That amount would be worth around $2,336 on the child’s eighteenth birthday. If you were able to also contribute $100 per month, the amount available for college would be around $34,000.
But, if you waited until that child’s tenth birthday to start saving, your initial $1,000 investment will only grow to about $1,491, in this example. If you contribute an additional $100 per month, the total saved will be about $13,000. That decade of delay ended up losing around $21,000! Lesson learned: start early to make compound interest work overtime!
It’s never too late to save. Start today: You can see from these examples that you still have time to make a big impact on college savings. Even if you put away $25 a week, your money could grow considerably if you average 7% growth; it would be over $10,000 in seven years. While the key is to start sooner rather than later, the best option is to just begin now wherever you are in life.
The Rule of 70 Chart
Years to Double
This is an example of the prime range for education savings: growth rates that are generally achievable using investments with risk profiles that are appropriate for college savings in time frames that generally permit an opportunity for a Rule of 70 double.
A word about growth rates: Your return on investment — its growth rate — is another important concept. Generally, the greater the risk, the greater the potential return. The question is how to achieve a growth rate that can keep pace with college inflation without taking on too much risk. This is an in-depth topic for another day. Generally, college investments are more aggressive (meaning, potentially having more stocks than bonds in the portfolio) during the earliest years of college savings. As the student nears high school graduation, investments usually shift to a more conservative profile (high quality bonds and/or money markets) to preserve capital. The last thing you want is to take losses just before the student is about to start college.
It is important to understand the historical return information and risk measures associated with investment strategies. Historical returns cannot predict future performance, but they can offer some broad indications based on the asset classes associated with the portfolio, such as the differences between stocks and bonds, or domestic versus international opportunities.
Action points for taking advantage of the Rule of 70:
• Whenever your son or daughter receives cash on a birthday or holiday, place a chunk in the college savings account.
• Establish a routine for saving. No matter what your current expenses are — and there will always be expenses — try to set up an automatic contribution each month or quarter. Even small amounts can add up to significant savings over time.
It’s cheaper to save than it is to borrow: It should come as no surprise that compound interest can work against you when using student loans. Following a wise college savings strategy will reduce the need for student lending in the future, reducing unnecessary student loan debt. College costs will be paid for one way or another, so why not use the most affordable option?
CollegeAdvantage - Ohio’s 529 Savings Program offers a variety of investment options that you and your family can take advantage of in order to maximize your savings and achieve your college goals. There are multiple opportunities based on your investing preferences and savings goals. All contributions that you make are tax-free and put you at an advantage for growing your savings. The choice is yours. Consider the Ohio's CollegeAdvantage Direct 529 Plan or the BlackRock CollegeAdvantage 529 Plan for your higher education savings goals.
No matter what vehicle you use to save for college, start now and let the Rule of 70 help you achieve your family’s college dreams.
John Hupalo is the Co-Founder and CEO of Invite Education, a company dedicated to providing the information, tools and services families need to effectively plan and pay for college. He has published Plan and Finance Your Family’s College Dreams: A Parent’s Step-by-Step Guide from Pre-K to Senior Year.
CollegeAdvantage is a 529 college savings plan offered and administered by the Ohio Tuition Trust Authority, an office within the Ohio Department of Higher Education. Before investing, please read the Offering Statement and all Supplements carefully and consider risks, fees, your investment objectives, and other relevant factors, before investing. If you are not a taxpayer in the State of Ohio, you should consider whether your home state offers any state tax or other benefits for investing in its 529 Plan. Other than the Fifth Third Investment Options (Banking Options), money contributed to an Account is not a bank deposit and is not insured by the FDIC or guaranteed in any way. Except for contributions invested in Banking Options, participants assume all investment risk related to the CollegeAdvantage Direct Plan, including the potential loss of Principal. Contributions invested in Banking Options are an obligation of Fifth Third Bank and are insured by the FDIC, subject to certain limitations.
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