There’s a guy out there who wants to help you. Big time. He’s a little quirky. And at times manic. But in the end, he’s a pretty likable guy. He likes to be called “Mr. Market”, or "M” for short.
Despite all his eccentricities, M is actually a very generous guy. In fact, he said he’s willing to pay for 75% of your kids’ college education if you put up just 25%. The rest is on him. Let’s run some numbers.
Assume college 18 years hence is going to cost you (or your kid) $400K. You have a couple choices:
1) Wait until the bill is due and cough up all $400K.
2) Put $100K into a 529 plan (a college savings plan) when the kid is born. And that is it. You don’t have to do anything after that.
But what about the other $300K you ask? Who’s going to come up with that cold hard cash?
M will. That’s his gift to you.
Based on the ‘rule of 72’, money doubles about every 9 years when returns average 8% annually. Given stocks have returned more than that on average over time, 8% is a reasonable assumption.
Put $100K into a stock account on day 1, and it is worth $200K after 9 years. As your kid turns 18, that $200K has doubled, and voila, you have $400K.
$100K from you, $300K from Mr. Market.
That is why the saying, ‘it is not timing the market, but time in the market that matters’ is so true.
The same math applies to retirement or any savings goal/event in the future.
So, when you are spending money on something that you don’t really need and/or is transitory in nature, consider giving it to your crazy uncle instead (aka stock market investing), and let him pay for half or more of your future wants and needs.