Attention parents: This index fund could help cover the cost of a college education for your child.
Warren Buffett has achieved financial success on a colossal scale, both personally and professionally. His net worth currently exceeds $120 billion, making Buffett the sixth-richest person on the planet. Additionally, Berkshire Hathaway has grown about 38,000 times in value under his leadership.
Those accomplishments suggest Buffett is a good source of financial insight, and he once said the surest path to success is "to be exceptionally good at something." He mentioned specific professions like doctors and lawyers, but his core message was that talent is always in demand. Come economic boom or bust, people who have some valuable skillset should be financially secure.
Cultivating such a skill set often starts with a college education. Unfortunately, tuition ranges from expensive to borderline extortionate these days. The average annual cost of tuition at three types of four-year universities is shown below:
- Public college (in-state): $10,940
- Public college (out of state): $28,240
- Private college: $39,400
When converted to four-year totals, the average cost of tuition ranges from roughly $44,000 for in-state colleges to $160,000 for private colleges. Fortunately, parents that start planning early can use the stock market to their advantage. Specifically, an index fund that tracks the S&P 500 (SNPINDEX: ^GSPC) can turn $300 per month into $164,100 over 18 years.
Read on to learn more.
An S&P 500 index fund provides broad diversification
The Vanguard S&P 500 ETF (VOO -0.07%) is one of three . It measures the performance of 500 large U.S. companies, including value stocks and growth stocks from all 11 market sectors. The fund covers about 80% of the domestic equities market and more than 50% of the global equities market.
In short, the Vanguard S&P 500 ETF allows investors to diversify capital across many of the most influential companies in the world. Currently, its top five holdings include Apple, Microsoft, Alphabet, Amazon, and Nvidia.
The S&P 500 has historically been a surefire investment
The S&P 500 has been a consistent moneymaker over long periods of time. In fact, the index has been a profitable investment over every rolling 16-year period since its inception in 1957. That means any investor who bought an S&P 500 index fund at any point in history would have made money if they held the fund for at least 16 years.
In short, patience is key to turning a profit in the stock market. The future will undoubtedly bring bear markets and recessions, but investors who buy and hold an S&P 500 index fund will almost certainly be well rewarded for their efforts.
An S&P 500 index fund could cover college tuition
The S&P 500 returned 1,710% over the last three decades, or 10.12% annually. I will assume a slightly more conservative return of 10% annually going forward. At that pace, $300 invested monthly in an S&P 500 index fund would grow into $164,100 over 18 years.
That sum would cover four years of college tuition in most cases at current prices. Of course, college may be more expensive in the future, but $164,100 should still cover a good chunk of the bill at many public and private universities.
Alternatively, some parents may not be able to afford $300 per month, and other parents may want to save more. The chart below shows how different monthly contribution amounts would grow over 18 years, assuming an annual return of 10%.
Monthly Investment | Total Portfolio (18 Years Later) |
|---|---|
$150 | $82,000 |
$250 | $136,700 |
$350 | $191,500 |
$450 | $246,200 |
$550 | $300,900 |
Chart by Author. Note: The chart assumes annual returns of 10% over 18 years, and all portfolio totals are rounded down to the nearest $100.
As a final note, the Vanguard S&P 500 ETF bears an expense ratio of 0.03%, well below the average of 0.37%. That means the annual fee on $10,000 invested in the index fund would total just $3.
Here's the bottom line: There are no risk-free investment options where the stock market is concerned. But an S&P 500 index fund like the Vanguard S&P 500 ETF is the next best thing. The benchmark index has been consistently profitable over long periods, and it returned more than 10% annually over the last 30 years. Investors are unlikely to find a similar combination of safety and compounding power. For that reason, parents saving for a college education for their kid(s) should strongly consider the Vanguard S&P 500 ETF.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Amazon, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
