Attention parents: This index fund could help cover the cost of a college education for your child.
Warren Buffett has achieved financial success on a colossal scale, both personally and professionally. His net worth currently exceeds $120 billion, making Buffett the sixth-richest person on the planet. Additionally, Berkshire Hathaway has grown about 38,000 times in value under his leadership.
Those accomplishments suggest Buffett is a good source of financial insight, and he once said the surest path to success is "to be exceptionally good at something." He mentioned specific professions like doctors and lawyers, but his core message was that talent is always in demand. Come economic boom or bust, people who have some valuable skillset should be financially secure.
Cultivating such a skill set often starts with a college education. Unfortunately, tuition ranges from expensive to borderline extortionate these days. The average annual cost of tuition at three types of four-year universities is shown below:
- Public college (in-state): $10,940
- Public college (out of state): $28,240
- Private college: $39,400
When converted to four-year totals, the average cost of tuition ranges from roughly $44,000 for in-state colleges to $160,000 for private colleges. Fortunately, parents that start planning early can use the stock market to their advantage. Specifically, an index fund that tracks the S&P 500 (SNPINDEX: ^GSPC) can turn $300 per month into $164,100 over 18 years.
Read on to learn more.
An S&P 500 index fund provides broad diversification
The Vanguard S&P 500 ETF (VOO 0.87%) is one of three . It measures the performance of 500 large U.S. companies, including value stocks and growth stocks from all 11 market sectors. The fund covers about 80% of the domestic equities market and more than 50% of the global equities market.
In short, the Vanguard S&P 500 ETF allows investors to diversify capital across many of the most influential companies in the world. Currently, its top five holdings include Apple, Microsoft, Alphabet, Amazon, and Nvidia.
The S&P 500 has historically been a surefire investment
The S&P 500 has been a consistent moneymaker over long periods of time. In fact, the index has been a profitable investment over every rolling 16-year period since its inception in 1957. That means any investor who bought an S&P 500 index fund at any point in history would have made money if they held the fund for at least 16 years.
In short, patience is key to turning a profit in the stock market. The future will undoubtedly bring bear markets and recessions, but investors who buy and hold an S&P 500 index fund will almost certainly be well rewarded for their efforts.
An S&P 500 index fund could cover college tuition
The S&P 500 returned 1,710% over the last three decades, or 10.12% annually. I will assume a slightly more conservative return of 10% annually going forward. At that pace, $300 invested monthly in an S&P 500 index fund would grow into $164,100 over 18 years.
That sum would cover four years of college tuition in most cases at current prices. Of course, college may be more expensive in the future, but $164,100 should still cover a good chunk of the bill at many public and private universities.
Alternatively, some parents may not be able to afford $300 per month, and other parents may want to save more. The chart below shows how different monthly contribution amounts would grow over 18 years, assuming an annual return of 10%.
Monthly Investment | Total Portfolio (18 Years Later) |
|---|
$150 | $82,000 |
$250 | $136,700 |
$350 | $191,500 |
$450 | $246,200 |
$550 | $300,900 |
Chart by Author. Note: The chart assumes annual returns of 10% over 18 years, and all portfolio totals are rounded down to the nearest $100.
As a final note, the Vanguard S&P 500 ETF bears an expense ratio of 0.03%, well below the average of 0.37%. That means the annual fee on $10,000 invested in the index fund would total just $3.
Here's the bottom line: There are no risk-free investment options where the stock market is concerned. But an S&P 500 index fund like the Vanguard S&P 500 ETF is the next best thing. The benchmark index has been consistently profitable over long periods, and it returned more than 10% annually over the last 30 years. Investors are unlikely to find a similar combination of safety and compounding power. For that reason, parents saving for a college education for their kid(s) should strongly consider the Vanguard S&P 500 ETF.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Amazon, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
FAQs
The funds can pay out dividends too, based on the performance of the companies that the funds track. Socially responsible: These funds also track market indexes but can be exclusionary, removing companies from the index that don't meet certain social or ethical standards.
Will investing in index funds make you rich? ›
They can offer reasonable returns
But not every index fund does well. However, history shows that the stock market increases in value over time. It means, in the long run, index funds have the potential to provide investors with reasonable returns for a low cost, making them good value for money.
How much does an index fund make per year? ›
Attractive returns: Like all stocks, major indexes will fluctuate. But over time indexes have made solid returns, such as the S&P 500's long-term record of about 10 percent annually. That doesn't mean index funds make money every year, but over long periods of time that's been the average return.
Are index funds a good way to make money? ›
Actively managed funds often underperform the market, while index funds match it. As a result, passively managed index funds typically bring their investors better returns over the long term. Plus, they cost less, as fees for actively managed investments tend to be higher.
Can you cash out index funds? ›
Capital gains taxes on that sale are yours and yours alone to pay. To get cash out of an index fund, you technically must redeem it from the fund manager, who will then have to sell securities to generate the cash to pay to you.
Is there a downside to index funds? ›
While indexes may be low cost and diversified, they prevent seizing opportunities elsewhere. Moreover, indexes do not provide protection from market corrections and crashes when an investor has a lot of exposure to stock index funds.
Can you become a millionaire from index funds? ›
Still, there's good news from this chart: With the right investing discipline, a solid index fund and time, there's a good chance you can become a millionaire, even if you understand little about the stock market. In fact, if you follow this plan, it may be difficult to avoid becoming a millionaire.
Can you live off index funds? ›
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
What if I invested $1,000 in the S&P 500 10 years ago? ›
Over the past decade, you would have done even better, as the S&P 500 posted an average annual return of a whopping 12.68%. Here's how much your account balance would be now if you were invested over the past 10 years: $1,000 would grow to $3,300. $5,000 would grow to $16,498.
How much is $1000 a month for 5 years? ›
In fact, at the end of the five years, if you invest $1,000 per month you would have $83,156.62 in your investment account, according to the SIP calculator (assuming a yearly rate of return of 11.97% and quarterly compounding).
How Long Is Long-term For Index Funds? Ideally, your investment tenure should depend on your goals. But that said, there has to be a minimum duration for which you should choose equity investing. The data shows you should have a minimum tenure of 7 years or more when investing in equities.
What index funds pay monthly? ›
ETFs that pay dividends monthly
| Symbol | AUM | Focus |
|---|
| SHY D | 24.605 B USD | Investment grade |
| JPST D | 23.429 B USD | Investment grade |
| SGOV D | 22.192 B USD | Investment grade |
| IGSB D | 20.567 B USD | Investment grade |
39 more rowsIndex mutual funds & ETFs
Constant buying and selling by active fund managers tends to produce taxable gains—and in many cases, short-term gains that are taxed at a higher rate.
Can index funds go broke? ›
All investments carry risk. An index fund, like anything else, can potentially lose value over time. That being said, most mainstream index funds are generally considered a conservative way to invest in equities (although there are lesser-known index funds that are thought to carry greater risk).
Which index fund pays the most? ›
The Invesco S&P 500 High Dividend Low Volatility ETF has a 4.74% dividend yield, the highest among our recommendations, but its risk is average. Meanwhile, the iShares Core High Dividend ETF has a 4.09% dividend yield but an expense ratio of only 0.08%, much lower than the 0.3% ratio for the Invesco fund.
Do index funds provide income? ›
Most index funds pay dividends to their shareholders. Since the index fund tracks a specific index in the market (like the S&P 500), the index fund will also contain a proportionate amount of investments in stocks. For index funds that distribute dividends, many pay them out quarterly or annually.
Do index funds give good returns? ›
Index funds are recommended to investors with an investment horizon of 7 years or more. It has been observed that these funds experience fluctuations in the short-term but it averages out over a longer term. With an investment window of at least seven years, you can expect to earn returns in the range of 10-12%.
Are index funds guaranteed money? ›
Market indexes tend to have a good track record, too. Though the S&P 500 certainly fluctuates, it has historically generated nearly a 10% average annual return over time for investors. (Just remember that future returns are not guaranteed.)
How long do you keep your money in an index fund? ›
Ideally, you should stay invested in equity index funds for the long run, i.e., at least 7 years. That is because investing in any equity instrument for the short-term is fraught with risks. And as we saw, the chances of getting positive returns improve when you give time to your investments.
