One investor’s two rules of investing: 1. Never Lose Money 2. Never forget rule No. 1.
Warren Buffett
If you are a new grandparent interested in helping fund your grandchild/ren’s future higher education, proceed with caution when it comes to choosing the actual investments.
A friend recently shared with me how, 20 years ago, 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 didn’t work 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 what they invested in—but it obviously wasn’t very safe.”
“I’ll say,” I replied, then promptly pulled out my iPhone and proceeded to the nearest online 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 annually?”
“I have a feeling,” she said, “I don’t want to know.”
“No,” I said. “You don’t. But I’m going to tell you anyway: $27,000.”
Versus $8,000: when it comes to paying for a University education, $19,000 is a significant chunk of change.
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.
20 years ago, if her in-laws had put that initial $10,000 in investments that yielded 6% average annual return, compounded annually, today that would be worth $32,000.
If the investment had yielded a 7% average annual return, compounded annually, today that would be worth: $39,000.
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 an enormous difference in a child’s life 20 years from now.
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Originally Published on Pink Gazelle
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