From: dodson@convex.COM (Dave Dodson)
Newsgroups: misc.invest
Subject: Re: $200/month for 18 years investment
Date: 8 Jan 93 18:44:03 GMT
Reply-To: dodson@convex.COM (Dave Dodson)
Organization: Engineering, CONVEX Computer Corp., Richardson, Tx., USA
Originator: dodson@bach.convex.com
X-Disclaimer: This message was written by a user at CONVEX Computer
              Corp. The opinions expressed are those of the user and
              not necessarily those of CONVEX.

In article <4245@ncrsoph.Sophia.NCR.COM> sstasuke@ncrsoph.Sophia.NCR.COM (Steve Stasukewicz) writes:
>
>I have a 3-month old son, and am starting to save now for his education.
>I have budgeted $200 month to "put away" for him until he is 18 years old.
>( Or whenever he graduates from college.  If he takes after his mother's
>side, it may be later.  I hope she doesn't read this.  :)  Anyway, where
>should I invest this $$$ to maximize my earnings?   

Before you choose what investments to make, you should figure out what you
goal is and what kinds of investments will allow you to meet your goal.
I notice that you are in France, so you will have to make adjustments if
your son will be attending college there instead of in the US.

I have two kids in college now: one at Texas A&M (in-state tuition) and one
at Purdue (out-of-state tuition).  A&M costs about $7,000 per year and
Purdue about $12,000, considering tuition, fees, room and board in a
residence hall, and books, but not considering spending money.  If you
take these as representative of in-state and out-of-state expenses, and
project college costs into the future at about 7% per year (college costs
have been going up faster than the rate of inflation) you can expect costs
to nearly quadruple before your kid gets to college, to about $26K (in-state)
or $45K (out-of-state) per year.  These numbers seem high in terms of today's
dollars, but remember that you will be paying in dollars eroded by 18 to 21
years of inflation.

So suppose you choose 4 years at $26K/year = $104K to accumulate in 21 years.
If you have a spreadsheet program, you can use the IRR function to determine
the internal rate of return you have to make on your $200/month for 21 years
= 252 months in order to be able to draw out $2167/month for 48 months.
Computing the IRR is the key, because it determines how much risk you must
take to achieve your goal.  Being too conservative will leave your student
short of cash.  Trying for a higher rate of return than needed exposes you to 
unnecessary risk.  It looks like achieving 7% would be adequate.  Hence, I
suggest using investments that pay about 7-8%, which would be bonds,
certificates of deposit, etc.

However, suppose you had an additional child.  If you put $200/month away
and it earns 12% per year, you probably could send both of them to college.
Or for one child, you could cut your contribution to $100/month.  For these,
you would need to try to get 12-13% and might consider a growth and income
mutual fund.

The key is to figure out what rate of return you need to realize to reach
your goal, and then try to pick an investment that will achieve that rate
with the least risk.

----------------------------------------------------------------------

Dave Dodson		                             dodson@convex.COM
Convex Computer Corporation      Richardson, Texas      (214) 497-4234
Newsgroups: misc.invest