Tuesday, October 4, 2022

How To Save For College In 10 Years

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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.

What I Mean By Adjust Your Mindset

Adjusting your mindset means sacrifice.

It doesnt mean you can never drink a grande mocha again, but it means you cant buy Starbucks twice a day, every day. It doesnt mean you cant own a car, but it means you probably cant lease a new BMW every 30 months.

You have to live beneath your means.

If you are struggling to keep your spending in check, ask yourself why.

Are you hanging out with people who make more than you and can afford to spend more than you? Are you trying to keep up with a lifestyle you cant afford? Or, do you simply not make enough money to cover all of your bills?

If you find it difficult to live within your means you will need to get this under control before you can aim to live beneath your means.

Best College Savings Plans

There are many different ways you can save for your childs college costs. Some plans have restrictions and penalties if they are used for non-college costs, while others offer a bit more flexibility. Just like with retirement investing, there are also benefits to a diverse approach to college saving.

Heres a closer look at some of these most common options:

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How Much You Really Need To Save In A 529 Plan

Part 2 of that “scary” number that you need to save each month for your child’s college is that number is based on saving 100% of their college costs. As a parent, you don’t need to pay for 100% of their school. Or, maybe you’ll pay for 100% of their public in-state tuition, and the rest is up to them. Or maybe you’ll just have a target savings number, and the rest is up to them.

It’s simply important to remember that you don’t have to save and pay for all their college. It’s THEIR college – not yours. Plus, there are tons of ways for them to find help paying for school, from finding scholarships, to getting student loans.

So, instead of stressing out about saving $500 per month, I’m going to make the following assumptions and save based on that:

  • I’m going to save for an in-state college that currently costs $10,200 per year
  • I will contribute to all 4 years of college
  • I will pay 50% of the projected college costs
  • I’m done contributing to the 529 plan when my child is 18
  • I expect college costs to continue to increase by 4% per year
  • I expect to get 6% per year return on my investments in my 529 plan

With these assumptions, you should be saving about $96 per month for your child’s college, or $1,151 per year. Let’s see how that breaks down.

However, if you’re on the high end, and want to contribute to pay 100% of your child’s education expenses at a 4 year private college, I included that in the chart below too .

Tips To Complement Your College Savings

Save $5000 in One Year

Have you set up a couple of educational savings accounts, but still want to learn more about how you can maximize savings? Check out these tips:

  • Apply for Scholarships: Some organizations and schools offer full-ride scholarships to cover all of your college expenses. But, dont let that deter you from applying to lower-value scholarships those can add up too!
  • Work during the Summers: Every little bit counts. You can also find a part-time job during the school year, but the summer is the perfect time to work so that you can focus more on your studies throughout the school year. For even more flexibility, you can sign up to babysit, walk dogs, or more with a platform like Care.com.
  • Get AP Credits: AP courses in high school help you save on the costs of credits in college. If there is a community college nearby, dual enrollment is a great option too.

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Simple College Savings Tips For Students

College is a privilege. Sure, most of us want our kids to pursue a degree, but that doesnt mean its our responsibility to pay for it. Its totally okay for them to take some ownership in their education. Even though your child is a full-time student, theres no reason they cant start building up their own savings fund. At the very least, doing this will help establish healthy money habits theyll carry into the future.

Here are some great college savings tips to help them get started:

How Much Should You Save For College

How much you should save for college depends on the type of college you want to attend, where you plan to live, your family’s financial situation, and how much money you can expect to receive in financial aid.

To figure out how much to save for college, add up your estimates for how much you’ll pay in tuition and fees, room and board , and school supplies for all four years. Then, from this sum, subtract the total amount of financial aid you expect to get , again for all four years.

You can estimate the amount of federal student aid you’re likely to receive with the Federal Student Aid Estimator tool.

For example, say you plan to attend a public, in-state college. In this case, you can expect to spend over the course of four years around $43,000 on tuition and fees, $5,000 on books and supplies, and $48,000 on room and board. Altogether, this comes out to $96,000.

Say you also received $8,000 in grant aid per year, or around $32,000 for all four years, and a $5,000 scholarship for your first year only. This comes out to $37,000 in financial aid.

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Set A Goal For Saving

Maybe you feel its appropriate to commit to funding 50%, and letting your kids come up with the rest through part-time work, scholarships and grants, or student loans, says Eric Roberge, a CFP and founder of Beyond Your Hammock, a wealth management firm in Boston. This is an individual choice that is up to you and your family, and theres no wrong answer here.

The cost of college tuition is increasingly complex, so figuring out how much your childs tuition will be can be a challenge in itself even more so if youre trying to plan for how much college will cost in 10-15 years. Scholarships, federal aid, and what college your child attends will all impact what the final bill will be. The current average cost $35,720 per student at least offers a reference point in determining how much you aim to save.

How To Save $100k: The Beginning Of My Journey

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When I first graduated from college, I got a job making a starting salary of $54,000 which was really ~$40,000 after taxes. Three and a half years later, I had saved over $100,000. It was an incredible milestone to cross on my early journey to financial wellness.

I did however have a couple of really great things to my advantage in terms of the amount I saved, which were:

  • I was fortunate to have no student loans
  • As a brand new college grad, I got a good entry-level salary
  • I got a raise and a bonus every year and got promoted, raising my salary by the end of the 3.5 years to ~$74,000

That said, whether or not I had these advantages, over time, I’ve become a saver by nature. This means, as long as I earn, I save, and I’ll talk a bit more about this below.

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The Cost Of Going To College

College costs tend to increase at about two times the rate of inflation each year a trend that is expected to continue for the foreseeable future. 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
Current Age
$104,049 $136,712

Note: Want 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 a number of ways to trim college costs.

One of the easiest ways is to invest the money youve set aside for your child or grandchilds college years is 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.

Education Savings Account Or Education Ira

An ESA works a lot like a Roth IRA, except that its for education expenses. It allows you to invest up to $2,000 per year, per child. Plus, it grows tax-free! If you put away $2,000 a year starting when your child is born, by the time they turn 18, you would have invested $36,000. Its hard to say exactly what the rate of growth is with an ESA because it varies based on the investments in the account. But at the average stock rate of 12%, that $36,000 would grow to around $126,000 by the time the child starts school. Congratulations, you more than tripled your investment, and now Junior doesnt have to worry about paying for tuition!

We like the ESA account because its likely a much higher rate of return than youd get in a regular savings accountand you wont have to pay taxes when you withdraw the money to pay for education expenses. An ESA isnt just for college tuition either. It can be used for K-12 private school tuition, vocational school or things like textbooks, school supplies or tutoring If your child doesnt end up needing it, you can transfer the money to a sibling for their school.

Why We Like It:

  • Higher rate of return than a regular savings account

Why We Dont:

  • Contributions are limited to $2,000 per year
  • You must be within the income limit to qualify
  • The amount must be used by the beneficiary by age 30

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The Pros And Cons Of A Roth Ira

Another investment vehicle to consider is a Roth IRA. According to Kantrowitz, a 529 savings plan and a Roth have a lot in common: You won’t be taxed on your investment gains, and you can make qualified withdrawals tax-free.

A Roth IRA is typically used as a retirement account, and so there are limitations on how and when you can use the money. When you withdraw investment gains from your Roth IRA before you’re 59 and a half, you have to pay a 10% penalty fee. If, however, you have a Roth IRA for more than five years and are using the withdrawal for qualified educational expenses such as tuition, fees, books and supplies you won’t have to pay the penalty fee or any income tax.

And if your child doesn’t go to college, you can still use the money for other things, like your own retirement, or even saving it so your child has a big head start on their own retirement savings.

Why A 529 Savings Plan Is Better Than A Brokerage Account Or A Roth Ira

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Whatever investment vehicle you choose, it’s important to understand the impact that your college savings could have on your FAFSA application and your expected family contribution .

Your EFC is a number used by colleges to determine how much financial aid you’re eligible to receive.

You can think about it like this: Colleges decide on a cost of attendance they then subtract the EFC from the cost of attendance to determine the amount of financial aid your child is eligible for. So if your family has a higher EFC, your child will be be eligible for less need-based aid from the state and federal government and the institution.

There are a number of factors that go into determining your EFC, but the most important factors are the student’s income and the parent’s income. A parent’s assets and a student’s assets, on the other hand, are not weighed as heavily. Accounts are also weighted differently depending on whether the child or the parent is considered the owner.

In other words, using certain types of investment accounts for saving for college can increase your EFC and decrease the amount of aid a child receives because some investment accounts are reported as assets while others are reported as income.

A 529 savings plan is considered a parent asset, so the amount that’s saved in it only reduces aid eligibility by up to 5.64%. For example, if you have $100,000 invested in a 529 plan, your aid eligibility will be reduced by as much as $5,640.

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When Will Your Child Attend College And For How Long

Despite the growing interest in gap-year programs, our model assumes that students will attend college beginning at age 18 and graduate in a 4-year period. We assume that college costs continue to grow at 3% above inflation from now through the projected graduation date.

Our rule suggests a savings target of approximately $2,000 multiplied by your childs current age, assuming attendance at a 4-year public college , and your family aims to cover approximately 50% of college costs from savings. Remember, this rule of is only a starting point to help you estimate your college savings goal and may change over time and based on your particular situation.

A Realistic Approach To Saving $10k In One Year

Ten thousand dollars is a big number to think about, so lets break it down into more digestible chunks.

If you want to save $10,000 in a year, youll need to save $833.33 each month.

Thats still a pretty big number to work with, so lets break it down even further. Youd need to save $192.31 each week or $27.40 every day to reach your $10,000 savings goal.

Heres another way to look at it: If you get paid every two weeks, youd need to put aside $384.62 each time you get paid.

If youre going after this savings goal with a spouse or partner, you can divide those amounts by two. Youd each need to save $416.67 each month, $192.31 biweekly, $96.15 weekly or $13.70 each day to reach a collective $10,000 in a year.

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Where To Open A 529 Plan

What many people don’t realize is that you can invest in almost any state 529 plan. For some people, it can make sense to use your own state’s plan to take advantage of the tax deduction – but not all states offer tax deductions on contributions .

If the state doesn’t matter, the next things to look at are performance and ease of saving. For performance, you want good performance for low fees. For ease of savings, we look at whether the plan can be connected to savings programs like Backer.

Check out this guide here, find your state, and see what plan we recommend: 529 Plan Guide.

SavingForCollege.com ranks the best plans every year. What plan you choose depends on the state you’re in. Check out the map below and find your state:

Lower Other Recurring Bills

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Reducing additional recurring bills will help you funnel money towards savings. Heres how you can in everyday life on things like utilities, cell phone, cable, internet and gym membership.

Save Money on Utility Bills

Cut the costs of your energy bills by adjusting your thermostat, changing filters regularly and sealing drafty doors and windows. Taking shorter showers, using water-saving faucets and running the dishwasher instead of washing dishes by hand can help lower your water bill.

See this story for more tips to save money on utilities.

Save Money on Cell Phone

No more paying over $100 for your cell phone bill. Switch to a discount cell phone carrier, like Tello or Mint Mobile, to save money.

Save Money on Cable

Cut the cord to eliminate costly cable bills. With certain streaming services, you dont have to miss out on live TV or NFL games.

These free TV apps let you watch shows and movies at no cost. Or visit your local library to check out DVDs of your favorite films or television series.

Save Money on Internet Service

Switching to a lower-tiered plan is one way to cut costs on internet service, but maybe you dont want to sacrifice your internet speed. Check out the deals competitors are offering and consider switching to a different internet provider. Sometimes just calling your current company and letting them know you plan to switch may sway them into offering you a nice discount.

Save Money on Gym Memberships

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