My eldest daughter Richa is in the junior year at high school, and for the past year we have been engaging in non conclusive discussions around what does she want to pursue as a career and the college she wants to attend and the simple math around good grades = good scholarships = lower tuition fee = happy family.
If you are among thousands of parents who have a son or daughter about to go to college, then you are waking up in the middle of the night, dreading the sticker shock of college education in the US and worrying about the finances. If you are like me, then you don’t want your baby daughter to start life with the disadvantage of a college debt, conveniently forgetting that she is no longer a baby and is 17 years old and should learn the virtues of hard work and struggle and lessons of real life.
But how much money are we talking about?
How much does it cost for an undergraduate education in the US. Well the prices vary significantly based on the college and the specialty. I live in Chicago and did a quick search for colleges in Illinois. UIC (University of Illinois at Chicago) lists the following annual college fee:
UIC is a highly rated college and the in state tuition fee is $13,704 . If my daughter is willing to stay in her parents house and work during the three month college breaks, she can save on the boarding expenses and earn up about $ 8,000 (@$15 per hour) per year from work, thereby reducing the total college expenses from $27,034 to $7,104 per year. This is assuming that no scholarships have been received.
On the other hand ,if my daughter is keen to study at an ivy league or out of state expensive college then the cost can easily balloon to 200K+ for four years. I have informed her that for our consideration this expensive option has been disabled currently and a boat load of scholarships may be the key to enabling this option.
Now if you are a new parent with a baby and would like to send your child to UIC or a college with a similar fee, then per the above table, it will cost you $54,816 in tuition fee for four years. This may look intimidating to begin with but in order to pay for this you may consider taking a trip to the nearby store.
Head to the grocery store?
Assuming both the parents are working and like many young couples you like to eat out everyday during lunch time at office. You go to a Panera or a Chipotle or your favorite café and grab a lunch and a drink – this will put you back by about $20 per day for both of you, or about $100 per week for the family. Keep in mind I am not accounting for your latte fix at Starbucks or drinks at a local bar at the end of the day or the steak and wine at restaurants during the weekends.
To start with, consider making your own sandwich and carrying a brown bag to office for just two days a week. Making your own sandwich from choice organic bread and turkey breast will cost you less than a dollar per serving. So after reducing $4 in costs for the four meals, your net saving will add up to $36 for the week or $144 for the month for two days of home lunch.
Now continuing this new family ritual every week for next 17 years and investing the money saved from carrying home lunch for two days in a low cost index fund, this little saving of yours will compound happily @7 percent and will become a princely amount of $ 64,590 waiting for you by the time your child is ready for college – thereby also leaving you an additional $10K for books and other expenses (assuming the tuition fee increase corresponds to the assumed inflation of 3%). Also as a un intended side effect, your health and instagram posts will benefit from the handcrafted organic multigrain bread.
Keep in mind that the investment growth rate of 7% is adjusted for inflation. Your sandwich cost is not—so the $10 per head lunch cost will not remain the same after 17 years – it will actually increase to more than $17 assuming 3% inflation. So if you save the inflation adjusted cost of the sandwich, your college tuition pot will be much bigger.
Why 7 percent?
Since its inception in 1928, the S&P 500 has returned about 10% per year. Adjusting for inflation the “real return” is more like 7 %.
If you graduate to carrying home lunch for more than two days per week, the market gains would have cooked a much bigger pot of savings. I am assuming that you are not not yet willing to compromise on your starbucks craving. More on that in another post. So go ahead, make a trip to the grocery store and don’t forget to buy those brown bags.
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