At Age 21, I Opened a College Savings Account for My Nonexistent Children

It will please some of you to know that I almost titled this, “Why I Am Not Crazy.”

No, I am not married. No, I do not plan on having a child in the next 5 years. And no, I do not plan on pursuing a higher degree.

I am 23 and, two years ago, I made a decision that will change the future of my nonexistent children.

I am lucky. I paid off my student loans in 3 months after college graduation. For over two decades, I saw my immigrant parents struggle to save for my college education. Most days, my parents would come home with neck pains and strained legs. They believed that I could achieve the American dream. My parents persisted with a promise. They told me and my siblings that they will subsidize our undergraduate educations — all three of ours. My parents gave me this gift of financial freedom and independence at age 21.

I cannot assume that my children want to pursue college. I mean, I do believe in alternative routes to success besides a formal college degree. I want my children to choose their own paths and, by the chance that they decide to pursue college, I don’t want them to stress over student loans. This is a decision and financial obligation that I have decided to undertake. I want to pass that gift to my children.

At age 21, I opened a 529 college savings account for my future children.

I decided to open a college savings account at that age because of a myriad of reasons.

The sticker price of a college education is not cheap. Let’s face it — According to a recent College Board survey, on average for the 2015–16 school year, a public 4-year university costs $19,548/yr and a private 4-year university costs $43,921/yr. I’m sorry, but I do not think $175,684 is a small sum.

Albert Einstein once said that compound interest is “the most powerful force in the universe.” The compounding of money could work for us or against us. We decide which path we walk down.

I don’t have a lot of money, but I do have time. That’s the beauty of my youth. I have a choice to make — I can have inflation catch up with me or make the compounding of the market work for me.

Inflation is no joke. In that same College Board survey, the average annual tuition increase was 3.4 percent at private 4-year universities and 2.7 percent at public 4-year universities. By comparison, the overall consumer prices in the United States increased 0.5 percent year-over-year in November 2015. At the inflation rate of 3.4 percent, a private 4-year university education could cost $405,271 in year 2040.

For the past two decades, the S&P 500 index annualized return is 6.2 percent. Assuming that this rate of return applies to the 529 savings account, if I were to contribute $7,200/yr for the next 25 years, then I could expect a return of $406,332. However, if I were to start contributing at age 30 for 18 years, then I could expect a mere return of $226,783.

A common mistake is to assume that you are only losing $50,400 ($7,200 * 7) by delaying contributions by 7 years. The real loss is $179,549 ($406,332 -$226,783) because of compounding. You cannot buy back time.

With the sticker cost of a 4-year private education of $405,271, I would need to contribute $7,200/yr if I start contributing today for 25 years. And, if I start contributing in 2022 for 18 years, I would need to contribute $12,900/yr.

So, per child, that’s $1,075/month for 18 years. I rather pay $600/month for 25 years.

I plan to stay in New York State in the near future, so I opted to open a New York State’s 529 College Savings Plan to optimize on the state income tax deduction.

• Flexible use of savings: If the beneficiary decides to not go to college or does not use all of the savings, I could always change the beneficiary to another child, grandchild, niece, or friend. In addition, the savings could be used for tuition, room and board expenses, books, and supplies.
• Tax benefits: The earnings grow tax free and will not be taxed if the withdrawals are taken out to pay for college. The New York State 529 plan offers a state income tax deduction of up to $5,000 ($10,000 for married couples filing jointly) on annual contributions to New York State residents.
• Low minimum to get started: It does not take much to start saving right now. I can open an account with just $25.

This is a no brainer for me. I know that this expense is looming in the near future, so why don’t I start now.

Little Tiff, my parents promised me to support my college education. Today, I promise to provide you with the best future — the future with the options to choose your path.