The real power of this concept comes from rate of return and period of years.
You may be able to influence the rate of return by creating a high returning portfolio, but you definitely can influence your future balance by starting sooner rather than later.
A little while back I wrote about starting Roth IRA’s for my teenage kids, something that should reap them massive returns down the road. Another idea is to start saving for college before the kids or grandkids are even born!
Adults (future parents or grand parents) can establish a 529 College Savings account today with the anticipation of having that money be used by a child or grandchild that has not been born yet. Here’s how:
- Create the account by completing the application
- Make yourself the owner
- Make yourself (or child if you’re the future grandparent) the beneficiary
- Change the beneficiary to the child or grandchild when they are born
- Contributions of up to $20,000 per year to this account are an IL income tax write off
- The growth on the account is not taxed
- Distributions are not taxed if used for approved post high school educational expenses
Assuming an 8% annual rate of return:
If you start saving $200/month (less than $7 a day) when…
The child is age 5 – (invested $31,200) at age 18 the balance would be $55,716
The child is born – (invested $43,200) at age 18 the balance would be $97,071
5 years before the child is born – (invested $55,200) at age 18 the balance would be $157,835
10 years before the child is born – (invested $67,200) at age 18 the balance would be $247,118
Remember the added bonuses: state tax deduction, tax deferred growth and tax-free distributions for college.
For less than $7 a day……………… What are you waiting for?