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I have a six-year-old daughter and I would like to save on a monthly basis to accumulate about $100,000 to pay for her wedding expenses by the time she is 25 years old. What is the best investment strategy for this plan?
-- Digish Doshi, Naperville, Illinois
I've gotten questions about how to save for a car, a house, college education, retirement and starting a business. But I've got to admit this is the first time I've ever been asked about how to accumulate a "wedding fund."
And judging by the amount you want to accumulate, it would seem you're planning for a pretty substantial blowout. Granted, we're talking about paying a hundred grand 19 years from now.
But even so, if you assume inflation of about 3 percent per year, the hundred thousand you'll spend in 2022 is the equivalent of about $57,000 today, or roughly three times the average cost of a wedding in the U.S. these days. (For a tool that allows you compare the cost of a wedding to the average in different regions as well as the nation, click here.
Save early and often
Okay, so how do you accumulate that kind of stash? Well, you've certainly got the right idea by getting off to a nice early start. You've given yourself nearly two decades to accumulate this hundred thou, which means that the monthly amount you've got to set aside will be much lower than had you waited till your daughter were, say, in high school or college. Still, the amount you must stick away is hardly negligible.
For example, if you set aside $195 a month each and every month over the next 19 years and earn 8 percent per year on your savings, you would have a wedding kitty of just over $100,000 by the time your daughter is 25.
Ah, but that is a highly theoretical figure. Why? Well, for one thing, I haven't factored taxes into the equation. Even if you manage to get most of your investment return in the form of long-term capital gains or dividends that are taxed at rates no higher than 15 percent, you're still going to have to give up a piece of your stash to the taxman, or taxmen as the case may be, since your state will want a piece of the action too.
You may be able to reduce the tax bit somewhat by saving in a Uniform Gift to Minors Account, although you should be aware that once your child becomes an adult, the money in an UGMA is hers. She may want to spend it on something other than a wedding. For more on UGMAs, click here.
Returns may vary
What's more, assuming you're investing your stash in stocks and bonds, or mutual funds that own stocks and bonds, you won't earn 8 percent year in and year out. Your returns will bounce around quite a bit. When you're adding money to a portfolio or pulling it out, the extent to which returns bounce around can affect the amount you eventually end up with.
Finally, there's the whole question of what return you can reasonably expect to earn. If you had started this regimen 19 years ago, or back in 1984, you would have had no problem earning 8 percent in a combination of stock and bond mutual funds.
Indeed, for the 20 years through 2002, stocks gained about 12.7 percent on average, while bonds gained about 9 percent. But many investment experts these days, including moi, believe gains are likely to be much lower in the years ahead. So I'd say counting on 8 percent annualized in a diversified portfolio is pushing it.
In fact, if you want to be prudent, I'd say plan on getting something more like 7 percent, maybe less. Obviously, that means you'll have to put away more than $195 a month.
Given the effect of taxes, the variability of year-to-year returns and the underlying uncertainty of just what you might earn, I'd say you should probably think it terms of stashing aside $250 to $300 a month if you want to increase the odds that you'll end up with a hundred grand.
Where to put it
As to how you should invest your monthly savings, I think the answer there is pretty clear: You want to shoot mostly for long-term capital growth. Which means you want to invest primarily in stocks or stock funds. For some guidelines about just how much you should have in stocks vs. bonds and in what types of stocks and bonds, check out our Asset Allocator.
One final note: I certainly don't want to impose my values on people's saving and investing decisions. But since you're talking about a fairly large financial commitment here (unless $250 to $300 a month is peanuts to you), I think it makes sense to consider what effect saving for your daughter's wedding will have on other financial priorities, such as your own retirement and your daughter's education expenses.
Remember the line from that old song that goes like this: "Those wedding bells are breaking up that old gang of mine"? Well, in your case I think you want to be sure that future wedding bells aren't breaking your family's budget and preventing you from dedicating resources to other financial needs.
Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He also answers viewers' questions on CNNfn's Money & Markets at 4:40 PM on Monday afternoons.