When to Start Saving for a Child’s College Education

When to Start Saving for a Child's College EducationChildren are expensive, we have a 1 year old daughter, and diapers, toys, clothes, and daycare add up very quickly. But one of the larger expenses associated with kids is their college education, which means that considering how that will work is imperative. Consider the following points about saving for a child’s college education.

For the 2015-2016 school year, the average in-state on-campus public school costs came in at $19,548 for a four-year public school. That number climbs to $34,031 when a student is attending school out of state. Private schools cost an average of $43,921, while a two-year public commuter school was “just” $11,438.

Realistically, the earlier that you can start saving for your child’s college the better. The longer you allow money sit in a 529 or other investment account, the more interest you can make from it. If you start saving money when your child is just a baby, $5,000 can turn into $19,980 over a period of 18 years. assuming an 8% interest rate. If you started with $5,000 and contributed $100 each month, that account would balloon up to $68,500 by the time your kid is ready for college. But the truth is that the monthly payments are more important than the initial amount, so even if you don’t have $5,000 to stash away now, all hope is not lost. If you had $0 saved now but contribute $100/month for the next 18 years, that would result in a whopping $48,500!

Start Saving as Soon as Possible

The simple answer to the question about when to start saving is to start saving as soon as possible. But in reality, that’s not always possible and there are other priorities in many people’s lives that push saving off until that promotion or raise comes. If you’ve got a child who is 10 years old, you’d need to sock away $350/month for 8 years to hit the $48,500 mark. This just underscores why saving early and often is so important!

Of course, not everyone needs to pay for their children’s college education. I think it’s very important for students to have some “skin in the game” when making college decisions, and it can often lead to your kids taking school more seriously. Hopefully they make smart decisions and go to cheaper schools, but taking out some student loans to cover the cost of education doesn’t need to be avoided at all costs.

But Always Put Yourself First

Most parents would prefer that their kid isn’t entering the job force with debt hanging over their head. As many as 70% of students do end up taking that route. For example I had about $25,000 in student loan debt when graduating. Have your child investigate scholarship opportunities, too!

Keep in mind that your own savings are important to protect as well. You should not be giving up your own retirement account to help pad the college fund. While student loans are always available, the same does not hold true for a retirement fund. Another option is that if you’re in a more secure financial situation when your child has graduated, you can help pay off the student loans.

Investing Tools and Techniques: Short Selling and Ratio Strategies for Stock Market Magic

The standard approach to picking stocks is to try to guess which companies are going to increase in value over time. There’s an alternative approach you can take, however; it’s called “shorting” and it involves doing the exact opposite. Instead of betting on which companies are going to win, you’re trying to identify the ones that are going to lose.

Why Try to Pick Losers?

Shorting a stock is a means to make money when you feel certain that a company is going to lose value. It’s a particularly valuable technique in down (or “bear”) markets, when general confidence is low and stocks tend to be declining in value in an unusual way. They’re actually a big part of how hedge funds operate; the “hedge” in question is the use of a series of short positions as a counter to the longer positions in their portfolio.

Statistically speaking, shorting can be seen as a bit more risky than traditional investing as markets tend to trend upward more often than not, and since you’re effectively taking out a loan rather than holding the stock directly. It’s more than just a day trading scheme, however. Shorting serves an important market regulation function in keeping stocks from becoming too overvalued when an irrational “feeding frenzy” starts.

The process of due diligence in selecting stocks to short is really no different than in picking the ones you want to add to your long-term portfolio. So, for example, let’s say you were interested in investing in the solar power industry since that’s an area that has been expanding quickly in recent years and still has considerable growth potential. Scouring sites that cover news about solar, we learn that battery storage technology is making great strides and poised for a major breakthrough. If a specific company is about to introduce a revolutionary battery product, it might be a good time to short their direct competitors.

How Exactly Does Short Selling Work?

The basic concept is actually pretty simple:

  • Instead of buying the stock you are interested in outright, you borrow shares of it from a broker, with the promise of replacing that same amount of shares later.
  • You then immediately sell those shares at the current price.
  • If everything works according to plan, the stock then drops in value.
  • You then buy the shares back at the lower price and return them to the broker, pocketing the profit (minus fees and interest).

The Risks of Short Selling

Of course, the big risk here is that your expectations are wrong and the stock rises in value instead of falling. In this case, you are a bit more vulnerable than you would be if you were simply holding direct ownership of a declining stock. Since you’re borrowing the stock, you’ll have to pay interest on it over time, usually about 2%. Even if the stock does decline, it has to decline at a certain rate to keep up with your interest and any fees or it won’t be profitable.

Brokerages generally do not set a time limit for how long one can hold a short position, but they also usually have the freedom to demand the return of the shares at any time they choose. Naturally, they will call in the shares if the stock starts rising significantly from the shorted position value to protect their investment. This means you have less freedom to “ride it out” with a shorted position if things don’t go the way you expect, though it is relatively rare for a brokerage to actually do this (and will likely only happen if there is a very unusual and sharp increase in value).

It’s also important to know that not every stock is available for shorting. Usually, the smaller a company is, the more likely you will not be able to short their stock. This happens because smaller companies can be so negatively impacted by shorting that they will not be able to conduct enough business to recover from the loss in value it causes. The biggest regulation imposed in this area is the “alternative uptick rule“, which prevents further shorting of a stock that has dropped more than 10% in value in one day’s trading.

So What Is The “Short Ratio”?

If you look at major financial websites, you’ll often see a “short ratio” mentioned for each individual stock. The short ratio simply expresses the number of days it’s currently expected to take to cover all the short positions, but it also indirectly tells you the number of shares currently being shorted by investors as compared to the number of shares available overall.

How do you get the number of shares being shorted? It’s pretty easy — just multiply the current short ratio by the 30-day average daily volume of shares, a number also generally provided to you by the major financial sites.

Successful Shorting

Reading the short ratio to determine how a stock is going to move is a complicated topic that takes added knowledge about other circumstances the company in question is in. Generally speaking, however, you can use it as a quick gauge of investor sentiment towards a company. The most basic read is that a high short ratio often indicates general confidence in the stock is dropping. There are exceptions, however, and understanding those exceptions (and the circumstances they’re found in) is the key to successful short selling.

Eleanor Cole works as a personal finance consultant. She shares her wisdom online with her articles as well as participating on social media channels.

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