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Generational wealth or a university degree?

Darcy Paterson

Sep 7, 2023  
Advice, Education

My best friend and I were drinking beers the other night. He told me about saving for his kids university tuition. His wife and him have two boys. Over 15 years they’ve saved $25,000 for each. A tidy sum. As he told me, a sense of achievement came over him. Still, he confessed that his wife and him had wondered how would they be able to create generational wealth.

When he confessed his interest in the idea he wasn’t expecting to get an answer.

The Opportunity Cost of Higher Education

Both of them are professionals who work for government institutions. She makes more than he does and together their income is modest. The desire for generational wealth is pretty common amongst wage earners. I’m right there with them.

I told him that the dream of generational wealth is 100% possible with the $25,000 each kid has saved. The only problem is they can’t spend it on tuition.

Conventional Wisdom

Culturally, we’re told the roadmap to middle class life includes a stop at university. I’m GenX and my grandparents dream was to have their kids get the education they didn’t have. For them, a university education equalled financial security.  

For their generation and for my boomer parents a degree did equal financial security. However, times have changed. 

Today, it’s difficult to see what the reward is for a university degree. Most grads end up competing for low-paying white collar office jobs that, if secured, still force them to live at home or pile on credit card debt just to exist.

Think this situation changes as one gets older? Nope. For office workers, incomes continue to drift sideways just barely keeping up with inflation. It makes you wonder why people still line up to get a university education.

Unconventional Advice

The reaction from hearing money saved for tuition would be better spent elsewhere is usually somewhere between surprise and contempt. Luckily this is my best friend so he was willing to hear out the reasoning of my advice.

I pulled out my iPhone and went the compound interest calculator at the SEC. I punched in the following numbers:

  • Initial investment: $25,000.
  • Monthly contribution: $0.00.
  • Length of time in years: 45
  • Estimated interest rate: 10%
  • Compound frequency: annually

His eldest is 15 which is why I chose 45 years as the length of time. He’d be 60 when he’s ready to retire. The interest rate is the average rate of return for the S&P 500 over that amount of time. I assumed that he’d make no further contributions. 

After 45 years, a $25,000 investment in an ETF that tracks the S&P 500 would yield $1,822,262.09. My friend’s kid could work as an Uber driver his whole life and retire rich. Inflation might dig into the value of that amount but it would have to be at the same rate of 10% for 45 years to nullify the gain. A scenario of small likelihood.

I know what I’d do with the $25,000. I’m not sure what my friend plans to do. I suspect they’ll use the money for tuition. Old habits are hard to break.