Question

2. If you want to invest in a $ 300 monthly savings plan for the future student of one of your children, starting in January 2017 and if you expect your child to start college in January 2030, how much will you have accumulated a month before that you start your studies? Suppose the effective annual return is 3.7% capitalizable. Also, since you invest in a long-term contractual plan, you do not pay taxes on the investment returns. Analyze your results and discuss the advantages or disadvantages of this plan.

Answer 1

The benefit of such types of plan is that there is benefit of taxation, no tax is paid since the investment is for a large period and there is also the benefit of compounding of interest rate. In the long-term investment, the compounding can increase the future value since interest is also charged on the interest accrued. The disadvantage of such investment is you have to have a lot of patience and discipline to make sure you continue to make such investment and even when the market is falling down you have to be disciplined with your investment.