Katie's Savings during her Mission
Katie has a good problem. She received $14,477.63 from the military for the GI Bill that she has to use for college expenses. She was also able to complete her freshman year of college without dipping into her savings by being frugal with her budget and working part time to earn more than she was spending. She stuck to a $200 monthly budget for groceries, eating out, gas/transportation, and misc. expenses. And she earned between $300 - $400 per month at her student job.
Katie has been called to serve a full time proselyting mission in the Florida Tampa Mission for The Church of Jesus Christ of Latter Day Saints. She leaves on July 17 and will be in Florida for 18 months. So she will not need this college money for at least 18 months. How should she invest this money? This is not a very long time in the investment scheme of things, but it is certainly long enough to put the money somewhere other than a normal savings account.
She won’t need all of this money right when she returns from her mission in 18 months. But her overall withdrawal period is still fairly short in that she will spend all of this money over the next 4 1/2 years. Looking at her spreadsheet, she will need approximately $2,000 per semester to cover housing and books. This is assuming her student job will cover her living expenses. So here are her options.
Option 1 - Regular Savings Account
$20,000 at 0.25% for 2 years = $20,100 Future Value
Option 2 - Certificate of Deposit.
$10,000 with an 18 month CD at 2.35% = $10,354 after 18 months
$10,000 with a 3 year CD at 2.60% = $10,801 after 3 years
Future Value = $21,155
Option 3 - Index Funds
Assume a return of 5%.
Future Value = $20,000 x .05 x 2 years = $22,100 total value
There is a lot of risk with Index funds, so it is possible that the value could be significantly less than $22,100, possibly even less than her initial investment of $20,000.
There are other potential choices, but this provides 3 basic options for her to consider.