Investments to Avoid in Saving for College

Despite numerous options of college saving options in internet websites and many other sources, many people still make the worst investment plans, leave them with money shortage when it comes to pay for college tuition. Most poor planning seems to arise from people’s desire to either outperform the more trusted investment choices or to try and find a “sure thing.” Both of these ideas, however, usually end up doing the opposite of what was intended.

Whenever you want to put your children’s college money in an investment, try your best to avoid these forms of investments:

1. Collectibles and artworks
Appreciation of works in arts can bring significant value in an investment, but this appreciation is based on people’s opinion and not tangible claim or real financial assets like in stocks. The value of artwork and collectibles can change dramatically overnight because there are no more buyers for a certain type of item. Thus, they are extremely susceptible to things like fads, trends, and recessions. Make this investment represents only a small portion in your financial portfolio, and none of your college saving.

2. High risk/high return stock market investments
Consider avoiding high-risk investments and strategies such as options, small companies, and international markets. The main reason for this is that you will have very little time to make up for investment mistakes as the start of college nears. Also, avoid any type of investment if the downside is a total loss, such as uncovered puts and calls, as well as investments in small companies in unstable third-world economies.

3. The 401k
Although your retirement plan contains investment options worthy of the college fund, this should not be the main source of college asset. The underlying investments may be acceptable, but the cost and timing of accessing the money could be disastrous for your broader financial picture. For most people, their children will be going to college within 10-20 years of their expected retirement. Taking a significant distribution from what is most people’s main retirement asset can put them back at square one with little time to catch up. Worse is the idea of taking an actual distribution from your 401k to pay for college expenses. In doing so, you will pay Federal and state income taxes on the withdrawal, as well as a 10% penalty if you are under 59 1/2. This could cut a $10,000 distribution down to $5,000 or less.

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