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The Key To College Education Funding


Sending children to college is a financial goal that many parents take seriously. However, too often the seriousness of this goal causes the parents to avoid any risk with their investments planned for college.
Hoping for sufficient funds for future college bills, many turn toward investments, which assure, and often insure, the return of principal. Investments like insured certificates of deposit, money market accounts, or U.S. Treasury securities may provide a good night's sleep now, but may fall short of providing the necessary financial resources when needed. Consider the Facts Statistics show over the past five years, tuition and fees for public colleges have risen faster than the inflation rate. For private schools, the cost increase is even greater. These increases mean investment returns during this same period merely kept pace; those earning less lost ground. Also, this comparison doesn't consider the income taxes you paid.

 

Minimize Exposure to Risk

The key to college funding is minimizing the exposure to the different types of risk. Generally, this is accomplished by finding the proper balance between fixed-income (debt) investments and equity investments.
Debt instruments, such as savings bonds and CDs, promise the investor a designated interest rate during the security's lifetime plus the return of the initial investment at maturity. While debt instruments are usually more stable and predictable than equity investments, the dollars returned at maturity don't have the buying power they did when the investment was made. This may make debt instruments an ineffective hedge against inflation.
Equity investments, like stocks and real estate, represent a complete or pro-rata ownership in the asset or entity. Equity investments have no maturity. The value at anytime is whatever another buyer, or the market, is willing to pay. This supply and demand component causes greater price fluctuation when compared to debt instruments - making equities more effective. Therefore, because the values tend to reflect the changing costs of related goods and services, equities may be a more effective hedge against inflation.

 

Proper Balance of Investments

What is the proper balance between debt and equity investments? Unfortunately, the answer is, "it depends." The proper balance depends on factors such as the age of the child, the rate of return needed to marry your investment amount to your goal, and your personal tolerance for risk (your good-night's-sleep threshold).
Parents with young children should consider a heavier allocation toward equities. An abundance of time reduces the impact of short-term market volatility. However, as college days draw closer, the relative stability of debt instruments like bonds or bond mutual funds will help minimize any surprises due to market volatility.
Mutual funds are an excellent place to turn as you prepare for college expenses. Most fund families offer a variety of debt and equity funds. Within each mutual fund, shareholders benefit from broad investment diversification and professional management. Then, as your objectives change, you can easily switch all or part of your holdings among the different funds. Finally, mutual funds are very affordable. Monthly investment programs are available for as little as $50 per month. Or initial, lump sum minimums of just a few hundred dollars may be more convenient.
The single, most important point about college preparedness is to start investing early. The earlier you start, the more prepared you are.

 

Free review

Call Helen Hou from the Principal Financial Group for a no-cost, no-obligation review of your retirement plan investments.