"One investor's two rules of investing: 1. Never Lose Money 2. Never forget rule No. 1."
If you are a new grandparent keen to help fund your grandchild/ren's future higher education, please proceed with caution when it comes to choosing the actual investments.
I was out with a friend for dinner a few weeks ago and she was telling me how 20 years earlier, her in-laws had kindly set aside $10,000 for each grandchild's post-secondary education.
"Wow," I said. "Is that ever a great gift for the grandkids!"
"In theory, yes," replied my rather sad-looking friend. "In reality, it isn't working out so well."
She went on to tell me that for the eldest grandchild in the family, that initial $10,000 was now worth... $8000.
"WHAT?!" I cried. "How that can be?"
She shrugged. "I don't know. I'm not sure what they invested in but it obviously wasn't very safe."
"I'll say," I replied and then promptly pulled out my iPhone, right there in the restaurant, and proceeding to the nearest on-line compound interest calculator.
I punched in a few numbers then looked at my friend.
"Guess what that $10,000 should be worth today - if 20 years ago they had put the money into safe investments that yielded an average of 5% return per year, compounded monthly?"
"I have a feeling I don't want to know," she said.
"No," I said. "You don't. But I'm going to tell you anyway: $27,000."
Versus $8,000: when it comes to helping pay for a University education, $19,000 is a significant difference.
Back home again, I did a few more calculations (I didn't have the heart to push the matter any further with my friend) to see what a slightly higher average annual return would have meant. And 20 years ago, if her in-laws had put that initial $10,000 in investments that yielded:
6% average annual return, compounded monthly, today that would be worth: $33,000
7% average annual return, compounded monthly, today that would be worth: $40,000
So the moral of the story is: if you are in a position where you can put aside some funds to help with your grandkids' education, wonderful! But when it comes to choosing the actual investments, proceed with prudence... for your decisions today could make a huge difference in a child's life 20 years from now.
About the Author:
Maryanne Pope is the CEO of Pink Gazelle Productions and the author of the creative non-fiction book, A Widow's Awakening. Maryanne also writes play scripts, screenplays and blogs and is a powerful inspirational speaker. For further details on A Widow's Awakening and Maryanne's other projects, please visit http://www.pinkgazelle.com/
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