Hi! It looks like you are asking two questions here, and I want to be sure to answer them both. Your direct question is if a college savings fund is a bad idea. The simple answer to that is no – a college savings fund is a great idea. College is expensive, and, if you are able to do so, saving ahead of time for your kids to go is smart.
The other unasked question, I think, is if it is better to put money into your kids’ college funds at the same time you are holding a lot of debt. That’s less simple!
Keep this principle in mind: in the financial world, you pay a higher interest to borrow money that you receive when you save money. That concept seems really unfair, but that’s how it is. So right now in 2015, when you save money in a bank, government bond, or Certificate of Deposit (CD), in today’s low interest environment, you’re only earning between 0.5 and about 1.5% interest. You can maybe get 4% in a very large, long-term CD but most of us are getting way under 2% in our liquid (easily accessible) accounts. When you borrow money, you pay much more than that amount. In 2015, when a person with good credit borrows, in general he or she pays about 4% for a home loan, 8% for a car loan, 5%- 8% for a student loan, 18% to 22% for credit card debt, and upwards of 25% for a payday loan. When you invest money in the stock market or corporate bonds, you could possibly have impressive gains of 30%, but you could also have losses that earn you 0% while wiping out your principle – the reward is potentially high, but so is the risk of loss.
Another factor to keep in mind is that when you invest, you have no guarantee that you will make a certain amount of return. You MIGHT earn 30% on your mutual fund, but you might also only earn 3% or you might lose money, too. On the other hand, the interest you must pay on your loan will ALWAYS stay at whatever rate you initiated – 4% or 8% or 22%. You know you’ll have to pay that interest but you don’t know if you will earn the interest, dividend or return on your investment you were aiming for.
So if a person has credit card debt at a 22% interest rate that goes unpaid month after month because the person wants to save and invest in a college fund that is making maybe 8% (but not a guaranteed 8% return), the college fund is probably not a good idea. It would be smarter and more cost effective to work really hard to pay down that debt, establish new habits of spending less than you make, and then putting the extra into a college fund when your high interest debt is gone. Many people will not be able to pay off their mortgage, so they will have that debt, but other higher-interest debt is better if paid off.
A final note – even if you have debt, if your company matches your 401K contributions, it’s good to contribute enough each paycheck that you max out the maximum your company will give you – no sense in missing out on money they are will pay in for you.
I hope this answers your questions! Please write back if not. There are so many decisions to make and it is so hard to know which ones are right. Thanks and have a good day!
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