Baby Danny
Danny on our Investing team (the one with great hair) and his lovely wife Lauren just welcomed their first child (shoutout Gus, though it’s not yet clear whose hair he got). This means that in addition to managing sleep deprivation, they just got to experience the incredibly fun spreadsheet exercise of calculating how much college will cost in 18 years.
And while the rate of tuition growth seems to have slowed a bit over the past decade, over the past 25 years, depending on the school, college costs have been rising 4% to 5% annually. That may not sound like a lot, but 5% on top of 5%, year after year, is a compounding monster.
To wit, Mizzou, all-in for a resident today, is about $30K per year. If those 4% to 5% increases keep up and Gus follows in his dad’s footsteps as a True Son, that annual bill will hit $65K. And God forbid he wants to follow in my footsteps and go to Georgetown – it’ll cost almost $220K per year. Multiply either number by four and you have, broadly speaking, Danny and Lauren’s daunting 18-year financial goal.
When we were talking this through, I told Danny that when I stared into this same abyss almost 18 years ago now, I tried to avoid paralysis by breaking the problem down into smaller, shorter sprints and focusing on what I could control. Because you’re not going to save $260K to $880K (or whatever it was back then) all at once – at least I wasn’t. So I set cumulative milestones and then tried to hit them based on a combination of savings rate, dollars saved, and return on savings.
In other words, if a couple earns $100K per year and wants to save $10K in a year, that couple could put aside 10% of their income. Or they could get a raise and save a smaller percentage. Or they could set aside $1K and invest with the “Hole Poker,” who’ll turn it into $10K en route to generational f-word wealth – though serious people probably shouldn’t rely on this last approach.
The point is that on the way to a big goal, you need to be able to pull multiple levers while passing through multiple checkpoints to make sure that you get there. In this scenario, for example, if the Hole Poker’s (or S&P 500’s) returns come up short, the savers can adjust on the fly by increasing their savings rate or picking up a side hustle to make sure the plan stays on track.
I’ve written before that I prefer to be vague about outcomes, but specific about process. That’s my version of controlling the controllables, because more often than not, good processes beget good outcomes (but not always because entropy).
This, however, is one of those times that requires a specific outcome. When that’s the case, give yourself as many levers to pull as possible, and measure often so you can be sure that pulling them is producing appropriate progress.
After all, Gus will be in college before any of us know it.
– Tim
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