There are two things I think about when it comes to contributing to my child’s College Savings Plan – how much will I need and how much will I have saved? Today, I’m going to teach you a quick way to determine how much your current savings will be worth when your child is ready for college.
We are going to use the Rule of 72 in our calculations. Here is how the rule works. You divide 72 by your rate of return. This tells you how many years it will take your money to double. I talked about the Rule of 72 in my previous post Rule of 72 – Your Financial Advisor’s Secret Weapon.
Here is how you can use the Rule of 72 when it comes to your College Savings Plan.
Scenario #1 – Imagine you have $5,000 in your College Savings Plan today and you are investing aggressively to get an 8% average annual return. If you divide 72 by 8, you get 9. Your money doubles every 9 years. If your child is 5 years old, she will enter college in 13 years and graduate in 17 years. When she enters college, your College Savings Plan will have doubled once and will be half way to doubling the second time giving you about $16,000 in savings.
Scenario #2 – Imagine you have $25,000 in your College Savings Plan today and you are investing moderately to get a 6% average annual return. If you divide 72 by 6, you get 12. Your College Savings Plan doubles every 12 years. If your child is 9 years old, she will enter college in 9 years and graduate in 13 years. By time she graduates, your money will have doubled to $50,000 in your College Savings Plan.
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