A Great Gift Gone Bad – A Cautionary Tale about the Importance of Investing Properly for a Grandchild’s Education
“One investor’s two rules of investing: 1. Never Lose Money 2. Never forget rule No. 1.”
If you are a new grandparent keen to help fund your grandchild/ren’s future higher education, please proceed with caution when it comes to choosing the actual investments.
I was out with a friend for dinner a few weeks ago and she was telling me how 20 years earlier, her in-laws had kindly set aside $10,000 for each grandchild’s post-secondary education.
“Wow,” I said. “Is that ever a great gift for the grandkids!”
“In theory, yes,” replied my rather sad-looking friend. “In reality, it isn’t working out so well.”
She went on to tell me that for the eldest grandchild in the family, that initial $10,000 was now worth…$8000.
“WHAT?!” I cried. “How that can be?”
She shrugged. “I don’t know. I’m not sure what they invested in but it obviously wasn’t very safe.”
“I’ll say,” I replied and then promptly pulled out my iPhone, right there in the restaurant, and proceeding to the nearest on-line compound interest calculator.
I punched in a few numbers then looked at my friend.
“Guess what that $10,000 should be worth today – if 20 years ago they had put the money into safe investments that yielded an average of 5% return per year, compounded monthly?”
“I have a feeling I don’t want to know,” she said.
“No,” I said. “You don’t. But I’m going to tell you anyway: $27,000.”
Versus $8,000: when it comes to paying for a University education, $19,000 is a good chunk of change.
Back home again, I did a few more calculations (I didn’t have the heart to push the matter any further with my friend) to see what a slightly higher average annual return would have meant. And 20 years ago, if her in-laws had put that initial $10,000 in investments that yielded:
6% average annual return, compounded monthly, today that would be worth: $33,000
7% average annual return, compounded monthly, today that would be worth: $40,000
So the moral of the story is: if you are in a position where you can put aside some funds to help with your grandkids’ education, wonderful! But when it comes to choosing the actual investments, proceed with prudence…for your decisions today could make a huge difference in a child’s life 20 years from now.
And, of course, if you’re Canadian and are able to utilize your TFSA for this purpose, then when the time comes to withdraw the funds, you can do so without paying any tax 🙂
Now, of course, there is also the option of contributing to a grandchild’s RESP or going the route of setting up a trust. But for advice on these, there is an outstanding article in the Sept 2015 issue of Canadian Money Saver magazine (in the “Ask the Expert” section).
Related blogs by Maryanne: The Magic of Compound Interest – Why Geometric Progression Matters
Maryanne Pope is the author of A Widow’s Awakening, the playwright of Saviour and the screenwriter of God’s Country. Maryanne is the CEO of Pink Gazelle Productions and the Chair of the John Petropoulos Memorial Fund. If you would like to receive Maryanne’s weekly blog, please sign up here.