We've said it before and we'll say it again: working more might mean some extra cash, but it won't make you wealthy. Investing takes that extra cash and makes it grow. In our series on building wealth, we're talking about investing to make your money work for you.
Once you get yourself on track for retirement, we suggest you start investing in yourself and your kids. Have questions about saving for retirement? In case you missed it, you can find out more about
401(k)s, and brush up on your knowledge of
IRAs in our last two blogs. Keep in mind, investing in retirement and education aren't mutually exclusive. You can put away money for your retirement while also saving for your child to go to school.
Here at Scholar Raise, we believe that education is an investment that pays a lifetime of dividends. This investment will have a long term effect on your kid's earning ability - workers with a bachelor's degree earn well over $1,000,000 more than high school graduates throughout their careers. If your kids learn to invest, the returns on this difference will be even larger. It's no secret that we think 529 plans are the way to go. Don't believe us? Here are some of the benefits of opening a 529 plan for your child:
Tax free earning and withdrawals
You will not be taxed on a 529 college savings account. The money in the account must be used towards college or a qualified education expense, but that covers more than just tuition and books!
Better performance
With a historical average 6% annual return, a 529 plan has much better performance than savings accounts, which often earn less than 0.1% per year. Two things make this possible (unlike with a savings account):
- Interest and returns: Basically, this is free money. A 529 plan works the same as a mutual fund by investing in a diverse series of assets that earn you interest or returns on your investment. The returns are then reinvested along with the original investment - earning their own incremental returns over time. In other words, if you put in money now, you'll have even more money later (literally, out of thin air). See the section on "compounding returns" below.
- Compounding returns: Let's say you generate 6% returns on $1,000. Next year, you can earn returns on both the $1,000 you started with and the earned $60. This reinvestment of earnings is called compounding returns, and it's a positive feedback loop of awesomeness. It's just another way of saying a little bit of money socked away now will become a lot more money later.
Least impact on financial aid eligibility
Out of all savings methods, a 529 plan has the least impact on financial aid eligibility. The rate caps out at a max of 5.64% of the 529 account balance, vs. 20% for a savings account. If you save $10,000 in a 529 plan, your need-based eligibility would only be reduced by $564, as opposed to a whopping $2,000 impact that same $10,000 would have if it were in a savings account
So, who wants to be a millionaire? It won't happen right away, but starting as soon as possible, even if it's with a small investment, gets the ball rolling. These investments might seem like three different strategies, but at their core, they're the same: Invest now, be patient, and reap the rewards later. Compounding returns work the best over time, so we recommend putting away whatever you can now to allow your money to grow. Isn't it time that instead of working more for your money, your money goes to work for you?
