Consistent investing can pay off over time
You choose one of my529’s 14 investment options for your beneficiary and make an initial investment. Over time, that investment could grow through dividends or market gains. The financial concepts of compounding returns and dollar-cost averaging can have a marked impact on your investment.
Compounding Returns: 529 accounts benefit from tax-deferred compounding returns. Any dividends are reinvested in the account, increasing the size of your account, and the dividends are exempt from tax while they grow in the account. The dividends you receive have the potential to earn their own dividends, which would further increase the size of your account. In addition, your account could also benefit from market growth. The potential for dividends on dividends and market growth on the combined principal and dividends of your account can really add up over time. Anytime you add money to your account, you increase the potential for compounding returns in your account.
Dollar-Cost Averaging: Dollar-cost averaging is a strategy of consistent investing over time that doesn’t try to time the ups and downs of the financial markets. Instead, you make regular contributions over time. When the market is up, your regular contribution will purchase fewer units in your investment option. But when the market is down, your regular contribution will purchase more units. This investing strategy helps to reduce risk in the event of a large drop in the markets soon after you invest your money. If your investment option is diversified among stocks, bonds, and principal preservation funds, it will not track the fluctuations of financial markets.
With tax-deferred compounding returns and dollar-cost averaging at work, it follows that consistent investing can pay off over time. The graph below shows the potential for long-term growth with consistent contributions and a constant return assumption.
Here are some ideas for increasing your contributions.
- Did you receive a raise this year? You can increase your contributions by the same percentage of your pay increase.
- Has a bonus or other windfall come your way? Invest some of it toward your child’s education.
- For Utah taxpayers, you can invest all or a portion of your Utah state income tax refund in your my529 accounts.
Interested in getting started? Log in to Account Access at my529.org and click on “Recurring Contributions” in the left menu.