Choose A Plan With Low Fees
You dont need to get a brokerage account to enroll in a 529 plan. Choose one that charges less than 1% in fees to save money on pesky charges.
If youre uncertain about what investment options to choose, its best to meet a financial planner. It will cost you less money and still give you the hand-holding you need in the beginning.
Start Saving Right Away
How much money do you need to be saving and in how much time? Theres no exact answer, but the sooner, the better would be the appropriate response. Savings calculators make that estimation more straightforward, with the aptly-named SavingForCollege.com being a good example.
Lets say, for instance, that youre a high school sophomore and hope to start college in 2021 at an in-state public university. Your households yearly income is $75,000, and your goal is to cover 50 percent of the projected cost of college . Your family will need to make contributions of $536 per month to a 529 plan. A 529 plan is a tax-advantaged savings plan which is legally known as a qualified tuition plan. Its sponsored by states, state agencies, and institutions and is authorized by section 529 of the Internal Revenue Code.
With that example, a savings gap of just under $67,000 would be left. That gap would be covered either by family or friends, your current income, and student loans. If you hope to cover all costs, without the need for any assistance, you and/or your family would have to contribute an average of $2,196 per month in a 529 plan.
In another scenario, if you plan to go to a community college with the same household income, the projected cost of school in 2012 would be $92,933. If you plan to cover 50 percent of costs, your family will have to contribute $231 each month in a 529 plan, Should you want to include all costs, youre looking at putting aside close to $1,400 a month.
How To Use The Calculator
The thing I like about this calculator is that gives you both a target TOTAL monthly contribution and a target monthly contribution PER CHILD. If youre like my wife and I and have a different college savings account for each child, this makes it easy to figure out how much to contribute to each account.
Heres how to use it:
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Start Saving What You Can
If you cant save even $250 per month, start with a less ambitious amount. Most 529 college savings plans will let you set up an automatic investment or payroll deduction with as low as $25 per month.
529 plans have an added advantage. When you save in a 529 plan, your money grows on a tax-free tree, causing it to accumulate quicker. Your state may also offer an additional tax credit or deduction for 529 plan contributions.
Once you get started with saving, youll find it easier to increase the amount you save per month. You will quickly get used to having less money in your checking account.
There are also natural opportunities to increase the amount you save. For example, once the baby is potty trained, you can contribute the money you were previously spending on diapers to the babys college fund. You can also invest windfalls, such as income tax refunds, inheritances and lottery winnings.
Wondering how your 529 plan may impact financial aid? Use our Financial Aid Calculator to estimate the expected family contribution and your financial need.
How Much To Save For College By Your Child’s Age
You’ve been saving for collegebut is it really enough? Here’s how much you should have saved for each year of your child’s life, based on their goals.
Across the nation, students and their parents struggle with the questions about paying for college. How much will they need, and where will they get those funds?
Very few families have the option of cash flowing freely to fund a students college education. That means advanced planning can make a world of difference when that student enters the school selection process. While grants and scholarships would be a cherry on top, families cant predict how much aid will be available when their child is born.
Knowing how much to save for college and creating a dedicated savings plan can set your family on a path towards an affordable education without the impending anxiety of settling for large amounts of student loan debt.
But how much is enough?
While there are no concrete answers, lets break down a simple way to set your own college savings goals and how you might get there.
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Benchmarking Progress In Saving For College
Its never too late to start saving for college, since every dollar you save is a dollar less youll have to borrow. But, it is easier to save the sooner you start, since the monthly contributions will be smaller and theres more time for the earnings to compound.
For example, if you start saving for college when the baby is born, about a third of your college savings goal will come from the earnings. If you wait until the child enters high school, however, less than 10% of the college savings goal will come from earnings and youll need to save six times as much per month to reach the save college savings goal.
If you want to check how much you should have saved based on your childs age, multiply the childs current age by $3,000 for an in-state public 4-year college, $5,000 for an out-of-state public 4-year college and $7,000 for a private non-profit 4-year college.
See also:How to Help Pay for College Without Impacting Financial Aid
Set The Right Monthly Goal
Is it a little too difficult to imagine the end goal, years from now? Consider walking it back to a monthly contribution amount. Just remember that how you save will make a big impact on how much you save by the time your child starts college.
Many experts recommend using a 529 college savings plan, a tax-advantaged investment account. A 529 plan offers tax-free growth and withdrawals for qualified higher education expenses, which include tuition and fees, room and board, books, computers, and special education expenses.
What does this mean for you? Choosing a 529 plan could mean a much lower monthly contribution since the money grows over time. With a 529 plan, solid monthly contribution amounts for a child born in 2017 would be about $165 for a public in-state school, $260 for public out-of-state, or $325 for a private university.
If you intend to save using a traditional savings account or a taxed investment account, youll want to adjust your monthly contribution accordingly. For example, the average interest rate on savings accounts as of June 2020 was 0.06% APY .
At that rate, in a savings account, youd need to contribute about $300 per month for 18 years to pay for a third of the projected cost of a public, in-state college around $500 for out-of-state and around $600 per month for a private university. Nearly double the required savings compared to a 529.
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Current Annual Cost Of College
This variable is a combination of two things:
Here are a few tools and resources that can help you find the answer to #1:
#2 is more of a personal choice. You may want to save for the entire cost of college, in which case you can enter the full annual cost. Or you may only want to cover a portion of it, either because its all you can afford, because you expect there to be other sources of funding, or because you want your child to have to pitch in as well.
Give it some thought and make your best guess based on what you know now about your personal preferences and your financial situation. You can always adjust this later, so dont worry too much about getting it exactly right.
How Much Money To Have Saved By Age 45
By 45, the traditional goalpost is to have saved up around four times your annual salary, according to Fidelity, which might mean about $200,000 or more. Alas, again, even that number might be far too low for you â and depends on the standard of living you hope to maintain in retirement.
Remember that this is the point in life when Fed data suggests you should stop expecting major salary increases down the line.
Therefore, you truly need to be saving as much as you can. If you haven’t already, consider opening up multiple retirement accounts.
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When To Start Saving For College
The earlier you begin saving for college, the better. Investment-based college savings accounts pay off when you invest in them for several years.
Although its only high school students who start thinking of college, building a fund for your childs schooling should start as soon as theyre bornor shortly after. The more time you have before your child enrolls in university , the better.
That said, there are other important personal finance goals you should meet first. Its wise to have a sound emergency fund and pay off all high-interest debt first. If you havent already, sit down with your family and financial advisors and make a financial planning roadmap.
Bottom Line: Save As Much As You Can
When it comes down to it, you’ll need to reconcile your numbers with what you can truly afford. Saving for college is important, but it needs to work with your other priorities, like saving for retirement or building an emergency fund.
Be sure you’re doing all you can, though. Cutting expenses to save an additional $25 a week could have a huge impact in the long runand make it less likely that you’ll struggle financially when it’s time for college.
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A 529 Plan Sounds Great But How Can I Afford It
The first thing you need to do is realize that anything you save is a good thing. College is expensive and once you look at a College Savings Calculator you might get overwhelmed and give up, dont. Figure out what your goals are. Do you want to be able to pay for one year of tuition? Tuition plus room and board? Community college? The calculator can help you figure out how much you should be saving to accomplish those goals.
Next, make a budget. There are a million websites and articles on how to make a budget or ways to save money, so I wont bore you. But, think about small thingsgiving up one lunch out per week can save you almost $800 per year. Ask friends and family to contribute too. A child only needs so many video games or toys, why not have grandma put that money into your 529 account?
How about contributing all or part of your tax refund, bonuses or other windfalls?
Another easy way to save your money is to never see it in the first place. You can have automatic payments taken out of your bank account or you could set up a payroll deduction.
Pick A Plan That Offers Tax Write
More than half of U.S. states offer a state tax deduction for 529 contributions. Thats on top of the tax-deferred growth potential all 529s already come with.
But most of those states only give tax breaks if you choose an in-state savings account. Therefore, its worth considering if its best to get an in-state account or seek an out-of-state one .
It might pay off to forego the state tax deductions if your states 529 investment options are subpar, for example. Meet with your tax advisor to make sure youre choosing the best option.
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How Much Should You Be Saving For College
I also think there are many situations where NOT saving for college can actually be the smartest decision, particularly if youre talking about using a dedicated college savings account.
But despite all that, you may find yourself in a position where youre already on track with your other financial priorities and you have plenty of room in your budget to save more.
If thats the case, and if saving for your childs education is important to you, then it brings up a big question: how much should you be saving for college?
The honest answer is that its really hard to say with any precision. There are a lot of variables that are next to impossible to predict, like how much college costs will rise, what kind of college your child will want to go to, whether or not theyll get scholarships, and on and on.
So Ill be straight up with you: youre not going to get a precise answer here. But you CAN get in the ballpark and at least start making some good progress.
To help you do that, I created a worksheet you can use to find your target savings goal. Theres both an excel version and a Google spreadsheet version, so you can choose whichever one is easiest for you. Here they are:
- Google spreadsheet: College Savings Calculator
Traditional And Roth Iras
An IRA is a tax-advantaged savings account where you keep investments such as stocks, bonds, and mutual funds. You get to choose the investments in the account and can adjust the investments as your needs and goals change.
Under the SECURE Act, you can now wait until age 72 to begin taking required minimum distributions , and the law removed the age requirement for depositing money into a traditional IRA, so you can continue making contributions at any age if you are still working. In general, if you withdraw from your IRA before you are 59½ years old, you will owe a 10% additional tax on the early distribution.
However, you can withdraw money from your traditional or Roth IRA before reaching age 59½ without paying the 10% additional tax to pay for qualified higher education expenses for yourself, your spouse, or your children or grandchildren in the year the withdrawal is made. The waiver applies to the 10% penalty only you will still owe income tax on the distribution unless it’s a Roth IRA.
Using your retirement funds to pay for your child or grandchilds college tuition does come with a couple of drawbacks:
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Limitations Of This Calculator
This calculator isnt meant to be the one tool youll ever need to do all of your college planning. Its meant to give you an easy way to get a ballpark college savings target that gets you on the right track.
So there are a few limitations worth noting:
- It assumes that each of your children will have the exact same college costs. This almost certainly wont happen.
- It assumes that youll get the exact same investment return every year. In reality your return will fluctuate up and down and you may get better or worse results depending on when those ups and downs occur.
- It assumes that you invest the same way for each child, which may or may not be true.
- It doesnt account for things like financial aid, scholarships, or tax credits, other than however you factor those into your estimate for Current Annual Cost of College.
- It doesnt factor in potential help from others, like grandparents or other family members.
In other words, you can feel good about using this calculator to help you get on the right track. But if youre looking for a more detailed answer that factors in all the specifics of your situation, you probably want to talk to a financial planner.
And as for where to put the money youre saving? Heres a guide that will help you figure it out: How to Choose the Best College Savings Account.
Happy saving!
College Savings Plan Guidelines
From the results, we can conclude that the goal for most people saving for college should be to have between $37,328 and $245,427 saved in the account. This is a huge range, no doubt. But remember what “low end” and “high end” mean.
The low end amount is for someone that wants to help their child pay for a public 4-year school. The high end amount is for someone that wants to fully pay for a 4-year private education for their child.
Parents should also remember that, even when saving for private school, many students who attend private schools get discounted tuition, or receive scholarships to offset the “real” tuition price. So, even that high end number might not make sense when saving for college.
In this scenario, the low end 529 plan will be able to pay out between $9,600 and $10,000 per year, for each of the 4 years of school. Given that the college costs will rise, that should be about 50% of a 4-year public school tuition in 18 years.
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Its Time To Get Serious About Saving For College
Its never too early to start thinking about a college savings plan. Whether your child is a teenager or toddler, the best time to start a college fund is now .
Making the right plan for your childrens future starts with understanding all of your investment options. Connect with a qualified investment professional for free through SmartVestor. These are people we trust to take care of you and your childs college investment.
Want to learn more about how to go to school without loans? Debt-Free Degreeis the book all college-bound studentsand their parentsneed to prepare for this next chapter. Grab a copy today or start reading for free to get plenty of tips on going to college debt-free!
About the author
Ramsey Solutions
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.