Sometimes people ask me whether I think parents should pay for their kids' post-secondary education. I've known people on both sides of this question.
There are some on the extreme who are willing to bankroll everything, right up through post-graduate work and beyond. And there are those who say, once high school is finished, you're on your own.
I come down right in the middle. I think parents should pay for their kids' undergraduate education if they can. And if they are planning to do it, the biggest mistake people make when they are saving for their kids' college is not starting early enough, when even small sums make a big difference.
If you open an account when your son or daughter is born with $100, and put in $100 a month every year until they're 18, you'll have $40,000 at the end. That's assuming a 6% annual rate of return, which is a reasonable assumption on a diversified, rebalanced portfolio. If you can start out with a bigger lump sum in the beginning, you'll be even better off.
Undergrad degrees are becoming more and more important for a successful life. The investment is worth it: According to a 2013 Canadian Centre for Policy Alternatives report, the average cost for tuition in Canada was expected to triple from 1990 to 2017, to a projected average of more than $7,000 for full-time tuition. But a bachelor’s degree-holder could expect to earn 84 percent more over a lifetime than someone with only a high school diploma, according to a 2011 study from Georgetown University.
But here's the caveat. You should not pay for your kids' undergraduate degree if that means skimping on your own retirement. Don't dip into your retirement savings and don't stop putting money into your retirement account to pay for your kids' college.
The last thing you want is to depend on your kids for financial support in your old age. That's not good for you or them. That's the second-biggest mistake you can make in saving for college.
As your son or daughter grows up, talk to them about when you're making the deposits and show them how the investment is growing. One of the hardest lessons for investors to learn is the power of compound interest. If you can teach your kids that eventually the interest on their account will earn more for them than the principal, you will have taught them a lesson that will serve them their whole lives.
You can read more about my philosophy on teaching kids about investing here: How to talk to your kids about money