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You might need stocks to accumulate enough savings to fund your kids’ education. But are stocks worth the risk? Read on to see.
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If the idea of having to put your kids through college is daunting to you, you’re surely not alone. The average cost of tuition and fees at a private college is a whopping $39,723 a year, according to U.S. News & World Report. And while it’s considerably less expensive for public colleges, you’re still looking at a good $22,953 annually for out-of-state tuition and $10,423 for in-state tuition.
And these are just rates for the 2022-2023 academic year. Over time, the cost of college has the potential to rise even more.
Because it takes a lot of money to fund a college education, it’s not a great idea to keep your cash reserves for that purpose in a savings account. A better bet is to invest your money, whether in a 529 plan that’s earmarked for college or a brokerage account, which gives you more flexibility.
But is investing in stocks for college too risky? The quick answer is, not necessarily. And if you don’t invest in stocks, you’ll end up taking on a different sort of risk.
The right way to invest in stocks
If you’re trying to grow your money to meet a near-term financial goal, then buying stocks generally isn’t the best idea. That’s because the stock market can be volatile, and stock values can fluctuate a lot. You’ll want to give yourself many years to ride out a potential downturn, so if your goal is to buy a house in 2024, you wouldn’t want to invest your down payment in stocks today.
But when you’re saving for a long-term goal, like college, stocks can be an extremely useful tool. And while there’s no guarantee you won’t lose money in the stock market, when you have a longer investment horizon, you’re more likely than not to make money by loading up on stocks.
In fact, you may want to think of saving and investing for college the same way as retirement. If you’re 30 years away from leaving the workforce, it pays to go heavy on stocks because you have lots of time to recover from a market downturn. But you probably wouldn’t want 90% of your portfolio in stocks the year before you’re set to retire.
Similarly, let’s say your oldest child is 14 years away from starting college. In that case, you should feel pretty secure loading up on stocks. But it would also be a good idea to shift over to safer investments once college is a couple of years away.
Not investing in stocks carries risk, too
You might think that investing your kids’ college fund in stocks is risky. But not putting that money into stocks is risky, too.
If you don’t grow your savings at a rapid enough clip, you’ll risk landing in a position where you don’t have enough money to cover your kids’ costs. So while buying stocks may be outside your comfort zone, it’s important to push past that for the sake of amassing a large enough college fund.
And if you’re worried about buying the wrong stocks, it could pay to enlist the help of a financial advisor. You might also choose to load up on broad market ETFs, which can be a less stressful way to invest than choosing different stocks individually.
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