Cash back programs are all over the place. Whether through the credit card you use, to store promotions, or even sites like Ebates, the cash back phenomena is pervasive in society and pushes people to consume. This is where a signficant portion of our wealth is going, but that’s a topic for another day.
For parents with young kids, one of the biggest expenses to prepare for is funding college. The cost of college continues to rise above the rate of inflation and most are concerned with saving enough while not sacrificing their future retirement.
Taking a queue from the cash back programs, how can you pay for college and get all your money back, not just the measily 1-2% you see in these programs?
Seems like an impossibility, right?
It is if you’re using typical methods such as a 529 plan that are pushed due to their ax advantages. Yes, they can have tax advantages but at what cost? Who cares about tax advantages when all the money goes to the college anyway? The money in these plans are only doing one job and are tied up with little control on where its invested with no guarantees it will be there when needed.
What if you were able to successfully accumulate enough money to fund college, say $250,000. The bigger problem is once you spend the money for college, it’s gone forever. Even at a low 5% rate of return over 30 years the account would have grown to over $1,100,000 due to the compounding of the interest. That’s a significant opportunity cost of $867,000 that can greatly impact your future wealth.
So what should you do?
One strategy to avoid this massive opportunity cost is to not relinquish all of your assets to pay for college education. Instead, allow your assets to continue to grow over your lifetime and and use them for collateral to obtain financing from another source. By doing so, you get to take advantage of long periods of compounding growth earning massive interest, while using someone else’s money and paying amortizing interest (i.e. decreasing interest each year).
In our example, if the same $250,000 was allowed to grow uninterrupted for the 30-year period, and you took out a loan for the same amount with the same 5% interest rate, the amount of interest earned would be nearly twice the amount of the total cost you paid for college including interest on the loan ($867,000 vs $483,000).
How great would it be to recoup all the costs and then some? What would that do for your retirement?
Is it time to start exploring options outside the typical advice to reach your maximum financial potential?
