The 22 Year Car Payment | Fee-Only Financial Planners Long Island

The 22 Year Car Payment

My staff and I were eating lunch together in the office, as we often do. Jeff Roberto, our Director of Portfolio Operations and Administration who is the father of three children, thanked me for giving him an article on how much it costs to raise a child these days: about $1 million, according to the calculations used in this analysis.

The conversation quickly turned to the cost of a college education, which can constitute a significant portion of the expense of rearing a child. I said to Christine Parisi – who has herself recently become a mom – that you could probably think of a college-saving program as a 22-year car payment, since saving for a newborn’s college education from birth is the equivalent of making 22 years of car payments, assuming the child enters college at age 18.

With this thought in mind, Christine crunched some numbers for her daughter Emily, who was born in December. She used cost of attending a private college today, approximately $40,000 a year, as her baseline assumption. Christine also factored in a 6% rate of inflation (the historical average for college tuition inflation) and an 8% return on investments. She then repeated the calculation but with a $20,000-a-year public college education as the alternate factor.

Here are the results:

College Number Yrs. Annual Tuition Total Cost Lump Sum Payment Monthly Payments
Private 4 $40,000 $471,194 $113,248 $872
Public 4 $20,000 $235,597 $56,624 $436

As you can see, funding four years of college is a huge expense for most households. To meet the expense of our typical private college one can make an initial investment of $113,248 or make a monthly payment of $872 for 22 years.

For a public college the numbers are less daunting but still a challenge, requiring a lump sum investment of $56,624 at birth or monthly payments of $436 per month for 22 years.

Then Christine decided to have some fun (if fun it can be called) with Jeff. She ran the numbers for his three children – Jeffery, Melaina and Kristin, ages 12, 9 and 7 – for both private and public schools. His monthly savings number for the next 14 years is $1,894 for public college or $3,789 for a private college. The poor fellow was understandably in a state of shock. “What’s a family with three children to do?” asked Jeff. “Hope? Hope for scholarships, I guess.”

Christine quickly pointed out that, as car payments go, these numbers are in Porsche and Maserati territory and, for many American families who have more than one child, perhaps out of reach.

Even scarier, many of our clients are now faced with additional graduate school expenses. Today’s children have it so good that there is almost no incentive to leave academia. After all, they don’t live at home and someone else continues to pay the bills.

Helpful Strategy

Our goal in sharing some of these concerns is to underscore the fact that coping with responsibilities and expenditures of this magnitude requires serious long-term planning. The bottom line is that the sooner you start a focused savings program, the better off you’ll be down the line. Not only financially, but also in terms of your peace of mind.

In addition to savings, we counsel our younger clients who are buying a home to take a 15-year mortgage rather than a conventional 30-year note. The idea is to have the mortgage paid off by the time the first child enters college. It also means equity in your home can be tapped, if needed, to supplement the savings you have accumulated for your children’s college education.

If you implement a timely and realistically structured tuition savings program, you might be pleasantly surprised when the time comes to send your future Nobel Prize winners to college. You’ll have assets accumulated, equity built up in your home and maybe your little wizard will conjure up a scholarship or two.

Disclaimer: R.W. Roge does not intend to provide investment advice through this newsletter and does not represent that the securities, indices or investment strategies discussed are suitable for any investor. Investors are advised not to rely on any information contained in this article in the process of making a fully informed investment decision. News, views,
opinions, recommendations and other information obtained from sources outside of OrbiMed are believed to be reliable, but we cannot guarantee the accuracy or completeness of such information.

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