“We don’t feel ready to start saving, yet,” said a recent prospective client, “We’ll wait a bit longer until our situation gets more stable.” This couple recently had their first child, still less than a year old. They were also foreign nationals, and uncertain about what their short-term would look like, let alone 15 or 16 years when their son is looking at colleges.
But when will they be ready: When they have their second child? When they’ve purchased their first home? When they have green cards? They do not know themselves, and so it delays decision-making, and that delay is itself a decision, and that decision carries a price.
The Price Of Procrastination
Waiting to take action on investing towards any goal has consequences. Most people are familiar with eroding factors like taxes, fees, and inflation. You could get a can of soda from a vending machine for a quarter back in the 80’s, while today it’s a dollar or more. A dollar today is not worth as much as it was thirty years ago for the average good.
The standard measure of inflation – the rate at which prices increase – is a basket of goods called the CPI (Consumer Price Index). However, college inflation* has been significantly higher, outpacing the CPI in every year but one in the last thirty, and averaging over 6% relative to the CPI’s 3%. This means your dollar isn’t just worth less over time, but much less when used specifically to pay for college expenses.
The longer you wait to plan for college – or any financial goal, for that matter – the more it will cost in today’s dollars. You can access the “Price of Procrastination” calculator through the tools website of Columbia Threadneedle, the sponsor of the Future Scholar 529 College Saving Plan, to figure out how much more you would need to save to put your child through college.
Let’s say you’re saving for a one-year old child towards a school with a cost of $25,000 today. Assuming college inflation is a modest 4% and investment returns are 6%:
- Investing today would require $486 per month to fully fund the cost
- Waiting six years would require $855 per month to fully fund the cost
The average family does not open a 529 account until the child is seven, according to Morningstar, meaning they’ve lost at least seven years of potential earnings and compound growth. That procrastination has a price tag of $31,819 over those years.
Why Every Year Matters
Everyone should have a basic understanding of compound interest. It creates and expands the wealth gap worldwide, augmenting the assets of the wealthy and driving the poor further into debt. Albert Einstein once said, “He who understands it, earns it; he who doesn’t, pays it.”
Compound interest is when you make money or your money, then make more money on that money. So if you earn 5% interest on $100, by the end of the first year you made $5, but at the end of the second year you’ve made $5.25 dollars. Take this and apply it across much larger dollar figures and you begin to get an idea of why the rich get richer, and the poor have such a difficult time digging themselves out of debt.
If you want to use a quick rule of thumb, you can figure out about how long it will take your money or your debt to grow using the rule of 72. Simply divide 72 by the compound annual growth rate and you’ll get the approximate time it would take to double the amount. For example, if you have 10% interest it would take about 7.2 years to double. This is also why credit card debt is so painful: At an average of 16.22% it would take only 4.4 years to double your debt.
No Decision Is A Decision
“In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” is commonly attributed to President Theodore Roosevelt. Doing nothing will not only get you nothing, you could inadvertently be handicapping your future potential. The best thing you can do is start saving something – anything – to start making progress towards future goals, because inaction is a guarantee that nothing will happen.
*As measured by annual tuition, fees, room, and board using data from the National Center for Education Statistics
Brian Boswell is a registered representative of and offers securities through MML Investors Services, LLC. Member SIPC. www.sipc.org, 101 Federal St, Suite 800, Boston, MA 02110. Tel: 617-439-4389. CRN202409-847602