Don't Prepay College Or Funerals
Chris wants to know if prepaying things is a good investment against inflation. Dave says no, but it does ward off inflation.
QUESTION: Chris on Twitter wants to know if prepaying things is a good investment against inflation. Dave says no, but it does ward off inflation.
ANSWER: No. It’s not a good investment, but it does work against inflation. The inflation rate of those items is what your rate of return is. The inflation rate on funerals is about 4%, so you’re making 4% on your money. The inflation rate on college is about 7%, so you’re making 7% on your money, which compared to 1% in a savings account right now is pretty good, but it’s still not good enough for college. So if you’re saving at the rate of inflation by prepaying it, you’re not making any money on your money. You’re just breaking even. What you need to do instead for college is start saving in a good mutual fund in an Education Savings Account (ESA) and earn more than 7%. As far as funerals go, you need to just have an estate. You need to have some money to pay for your funeral. They’re not that expensive if you’ve saved up some money and you have some investments. But a prepaid funeral is not something I suggest. Prepaid college is not something I suggest. Stay away from those things.