Ask the expert: Using savings accounts or money market accounts to start an education fund
September 30, 2010
Q: I have a 2-year-old grandson, and I'm starting to put aside some money on his behalf for future needs such as education. What are some safe and appropriate things to do with that money as it builds?
A: Oddly enough, "safe" and "appropriate" may be two different things in this instance.
To be completely safe, FDIC-insured savings accounts and money market accounts would be the way to go. Normally, you could add CDs to that list, but since the best CD rates require the longest lock-up periods, they may not be the best choice when interest rates are so abnormally low. A return to normal inflation later would mean even the highest CD rates today would lose purchasing power.
The reason "appropriate" might be different from "safe" in this instance is that, with a long time horizon in mind, you might consider some more aggressive investments, such as stocks. Assuming the education needs you refer to are for college (as opposed to private school at an earlier stage), you're looking at 16 years or so before your grandson will start needing to access the money.
With that long a time frame, it is perfectly appropriate to invest in stocks, at least to some degree. While stocks won't be completely safe, they do typically provide more protection against inflation than deposit accounts.
Perhaps the best course is to start slowly. Shop for savings accounts or money market accounts, and find the best savings or money market rates you can. Then, as this account starts to build, you can consider investing some of that money in a diversified stock fund. Look for a fund with reasonable fees, and which has done well over a period of both rising and falling stock prices. This will give you some balance between safety and growth, and that's a sensible way to build for the long term.
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