Simple Rules For Saving Money
Each state has its own 529 program and its financial firm to manage them, and the fees can vary. Some charge just 0.1% or 0.2% in fees. You can choose any state plan you want not just the plan in your state. A website called Savingforcollege.com can help you find a good plan.
While a 1% or 2% fee sounds small, remember that it’s a fee charged against your return. So if you’re getting a 4% annual return, a 1% fee takes a full quarter of that return away.
That seemingly small fee would substantially slow down the amount of growth in your portfolio, Gibson says. That said, some states will give you an extra income tax break if you invest in the state 529 plan where you live, Gibson says, so find out if your state offers that tax break and factor that into your decision.
6. Setting up a 529 plan creates an easy way for friends and family to kick in money to help you save for college.
Listener Phil Cunningham did this before his child was even born. The Washington, D.C., resident made a request for the baby shower.
“Look, we don’t need a lot of onesies, we have a high chair. Please, don’t buy us stuff,” Cunningham told guests. “What we really, really, really would appreciate is if you just put in 10-20-50 bucks, whatever you can, into the 529 account.”
Singletary says states like Maryland offer webpages that parents can set up and even add a photo of their child so that others can contribute.
Cost Of Going To College
College costs tend to increase at about two times the rate of inflation each yeara trend that is expected to continue indefinitely. Heres what you can expect to pay for each year of tuition, fees, and room and board by the time your kids are ready to head off to college :
|Estimated Annual Future College Costs|
Note: Want to see an estimate of how much it will cost to send your child or grandchild to college? Use the College Cost Calculator at the College Savings Plans Network.
Keep in mind, these numbers represent a single year of costs the number of years your child attends college will depend on the degree they are seeking. While many students will qualify for financial aid, scholarships, and grants to help cover college costs, there are still a number of ways to further reduce college costs.
One of the easiest ways is to invest the money youve set aside for your child or grandchilds college years in tax-smart investment vehicles. These plans and accounts allow you to efficiently save for your child or grandchilds education while shielding the savings from the IRS as much as possible.
How Much Do I Need To Save For My Child’s College
The main factor that affects the amount of money parents should save for college is the type of school their child might attend. Costs vary widely between in-state public, out-of-state public, and private colleges.
Parents should start saving as early as possible, but most families do not need to plan to cover the total cost. Expected contributions vary by income level and school choice. CollegeBoard’s expected family contribution calculator can help parents determine how much to save for college.
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Tips For College Students To Save Money
Parents dont have to take the burden of college savings alone. Children should also become involved in the effort as this concerns their future. Picking up healthy saving habits early on will teach your kids how to be responsible with money in the future. To learn how much to save per month for college, students should check out these practical college saving tips.
Ugma And Utma Accounts
You can open a Uniform Gifts to Minors Act or Uniform Transfers to Minors Act account on behalf of a beneficiary under 18, and all the assets in it will transfer to the minor when he or she becomes an adult .
Young adults are able to use the funds for anything they want. That means they wont be limited to qualified education expenses. Another plus is that you can contribute as much as you want. The downside is that there are no tax benefits when contributions are made. Earnings are taxable.
A custodial account is an irrevocable gift to the minor named as the beneficiary, who receives legal control of the account at the age of majority.
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Pick The Right College Savings Plan
The best way to save for college is by picking the right investment plan. A good investment strategy allows you to take advantage of compound interest and maximize your returns.
And be sure to take advantage of any tax-deferred options at your disposal. Well look at four college investment plans you can consider in a later section.
Use An Ordinary Investment Account
One disadvantage of both the 529 and the Coverdell is that if your child ends up not needing the money for educational expenses, theres a tax penalty for non-educational withdrawals from the account. Using an ordinary investment account gets around this you have to pay taxes on all investment gains, but you dont have to pay an additional tax penalty if the money isnt used for educational purposes.
This is a good option if you want to be able to hedge your bets down the line, but it comes with a big disadvantage. If your student is applying for more financial aid using the FAFSA, assets in an ordinary investment account will have a negative impact on the student loans and grants theyll be able to get. This means that they may have to rely more on private student loans, which may have higher interest rates and stricter requirements.
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When Should You Start Saving For College
As soon as possible! Thats if youve already taken care of Baby Steps 14.
Starting a college fund is a great goal, but its not the only goal. You need to pay off debt, have an emergency fund, and start saving for retirement before you jump into saving for college. There are other ways to pay for college too, like using grants and scholarships. Bottom line, you need to take care of your future first, then you can bless your kids. Its not selfish. Its smart.
If youre following the Baby Steps, you know that saving for college is Baby Step 5. That means there are four other steps you need to take before you even think about Juniors college education:
- Baby Step 1: Save $1,000 for your starter emergency fund.
- Baby Step 2: Pay off all debt using the debt snowball.
- Baby Step 3: Save 36 months of expenses in a fully funded emergency fund.
- Baby Step 4: Invest 15% of your household income in retirement or a Roth IRA).
Which Method Ive Chosen
What: Ive chosen to use a 529 for my childs education.
Its earnings grow tax-free, and qualified withdrawals have no penalties.
Its specifically earmarked for education and cant be blown away on anything once my child turns 18 like they would be able to with an UTMA.
If I happen to overfund it, my child can hold onto it for future educational purposes or until they have children of their own and decide to pass it down.
I dont like the Roth IRA option because that money is supposed to be for my future retirement. Because Im in a sound financial position, I can both max out my Roth IRA for my retirement and fully fund a 529 account. That way, I can just use the 529 for my childs education and dont have to jeopardize my Roth IRA retirement funds.
How: I am currently underfunding in the early years and will pay the difference out-of-pocket once my child is close to 18 and ready for college. At the moment, I am auto-investing $500 per month into the account.
When: I took advantage of the 529s flexibility in being able to change the beneficiary between family members easily. Before my child was born, I designated the beneficiary to be me. Then once my child was born, I changed the beneficiary to their name. Why? Due to the powerful effect of compound interest, the sooner you invest, the better the results .
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Get Help From Friends & Family
Friend and family, particularly grandparents, in many cases want to help with saving for college. The 529 plan makes that easy, allowing anyone to contribute. Asking for contributions in lieu of birthday or holiday gifts is a great way to add to the fund. The 529 plans vary, but most of them have ways to accept gifts, and some retailers sell 529 gift cards, though those include a small fee.
People can also give in other ways, including many of the ways listed on this page, but its important, especially if theyre not the parent or guardian, to research the negatives as far as tax impact, and impact on financial aid.
How To Choose A 529 Plan
Nearly every state has at least one 529 plan available, but youre not limited to using your home states plan. Each 529 plan offers investment portfolios tailored to the account owners risk tolerance and time horizon. Your account may go up or down in value based on the performance of the investment option you select. Its important to consider your investment objectives and compare your options before you invest.
How Much Of The Bill Do Parents Plan To Pay
Findings from Fidelity Investments’ 2020 College Savings Indicator Study5 also reveal that although many parents plan to pay the total cost of college and are increasingly on track, they need to start saving earlier: Fewer parents are starting to save before their child reaches the age of 233%, down from 37% in 2018but are on track to meet 33% of their college funding goals. The good news: This important college savings indicator is up from 28% in 2018.
Weve seen the percentage of costs parents intend to cover grow over the past several years, even as college costs continue to climb. Parents want to help minimize the burden of potential student loans, explains Rita Assaf, vice president, Retirement and College Leadership at Fidelity Investments. Despite these good intentions, fewer families today can realistically reach these lofty savings goals.
Any way you look at it, parents are on the hook to pay the lions share of college expenses. To keep things simple, our 2K rule of thumb methodology assumes that parents, on average, are expecting to cover 50% of college costs from savings. Thats the starting point for our college savings calculator. Your own situation might vary, so weve added the flexibility to let you input the percentage of college expenses that you expect to pay from savings.
Best Ways To Save For College
Instead of saving in a traditional bank account, there are plenty of options for investing your money so you can take advantage of compound returns. An important college savings caveat is that, depending on the strategy you use, investment earnings will add to your total savings.
A 529 plan, for instance, is a tax-advantaged education investment account that individual states offer. Some states give residents a tax break for using their home account, but you can choose any plan you like. As you would in a 401 or an individual retirement account, you can typically choose your own funds to invest in or opt for a mix of funds targeted toward your childs anticipated college start date. That will ensure your investments arent too risky or too conservative.
If you save each month in a 529 plan, you could contribute less per month and save the same total amount when your child goes to college. In our example from above, youd have to save $209 per month for 13 years to reach about $44,000 in savings, if your investments receive a 6% average annual returna reasonable goal based on historical stock market returns. Thats about $96 less per month than if you didnt invest your money.
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Money Monday: Getting A Head Start On Saving For Your Child’s College Education
– Its no secret that college costs a lot of money.
Those costs were already scrutinized, but the pandemic has forced many families to take an even deeper look into their childs future education.
The cost of going to college has skyrocketed. The University of Pennsylvania alone in 1950 was $600 a year for tuition. Now, its close to $55,000 a year. Of course, how much you pay will depend on which college you choose, but in general, most people will pay tens of thousands of dollars for a college education,” Laura Petrecca, the deputy editor of Millie Magazine, says.
Laura recommends parents use a college calculator to try to plan out the cost.
‘Oh no, thats years out’. It could be seventeen years out. It could be ten years out, but its still really important to get a ballpark figure of what college may cost you. Many colleges have prices out there that will make your eyes pop, explained Petrecca.
And then start saving early.
One of the best things parents can do as early as possible is to open a 529 savings plan. This is an amazing, tax-advantaged account that you can use to save for college. These 529 plans are very similar to a work 401k, in that theyre paid for qualified educational costs, while your 401k pays for your retirement, continued Petrecca.
And others, like family members, can contribute to it.
What Happens To Your Savings If The Child Doesnt Attend College
If the child in your life decides that college isnât in their future, there are still things that you can do with college savings that youâve invested for them.
Some forms of college savings are more flexible than others.
For example, 529 plans never expire, so you can let them sit in case a child decides to go to school later. Or you can even transfer them to another child or grandchild.
In contrast, Coverdell ESAs are limited by the age of the beneficiary.
Worst case scenario, you can choose to withdraw money out of a 529 plan or Coverdell at any time. The downside is that youâll have to pay tax on earnings, plus a penalty.
With a custodial account like a UGMA, you donât have to worry about these penalties since the money isnât restricted to just education-related expenses. The child can use the money for whatever they wish.
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How Do I Know How Much To Contribute
This is the big question and its completely dependent on your financial situation and your preferences. While you may want to save for your child to go to an Ivy League college, if thats going to interfere with your own retirement savings, thats probably not the best idea.
You may also not want to save for 100% of your childs college expenses if you feel like they should have to contribute in some way as well. There are personal preferences that go into how much you decide to save.
The other factor is trying to determine just how much college is going to cost in the future. College costs are rising rapidly and, while I hope theres an end to that in sight, it makes it a little difficult to predict what its going to cost in the future.
There are a lot of great tools and calculators out there to help you figure out how much you should be putting away. Savingforcollege.com has a really easy to use calculator that can help you get started. When I was trying to figure out how much to save, I started with that calculator to get an estimate. Once I decided to open an account and actually start funding it, I started using the Personal Capital education tool to show me exactly how much I needed to contribute each month.
Saving For Your Childs Education: When Should You Start
The short answer? As early as possible. Its never too soon to saving for your childs education. Yet, according to Sallie Mae, a mere 56% of parents are actively saving for their childrens education.
Its possible you wont have to save the full amount. Mark Kantrowitz, SVP of the Edvisors Network, suggested in a Bankrate article to save only one-third of the expected cost of post-secondary education. The balance can be paid over a longer period of time through loans, grants and scholarships.
Kantrowitz recommends looking at the projected costs of your childs desired school, then dividing the number of months remaining until he or she goes to college that figure would be your required monthly savings. For example, if your child was born this year, youd have to come up with approximately $150 per month for a public college.
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How To Save For College
There are almost as many types of accounts to help save for college as there are types of colleges to save for. Which account is best depends largely on a savers financial situation, how much they want to save, and how much theyre able to save.
Here are some of the most common and effective ways to save for college.