When Should I Start Saving For My Child’s College

Where Should You Invest Your Money

If you’re investing for college you should consider opening a 529 savings plan or a state-sponsored investment account exclusively used for investing for school. With 529 savings plans, individuals can use the money they withdraw for college and K-12 tuition and other qualified educational expenses without paying income tax on any investment gains.

529 savings plans contain a variety of different funds such as mutual funds, bonds funds and ETFs. They are generally recommended for investing for college because of the tax benefits people get from them: You can contribute up to $15,000 tax-free and your earnings will grow tax-free.

States offer different 529 savings plans, and you don’t need to be a resident of that state in order to qualify for an account. However, certain states may offer tax benefits for in-state contributions. For example, in New York, in-state residents have tax-deductible contributions, so residents can reduce the amount of their taxable income if they invest in a 529 savings plan.

You can also opt to invest for your child’s education using a brokerage account or a 529 prepaid tuition plan. These, however, are less popular options.

When Should You Get Started

The short answer is that you should get started as soon as possible. I’m not saying that you need to start a 529 plan for your yet-to-be-born children, but the longer you allow for your money to compound , the better.

As a final thought, consider this simplified example. Let’s say that you want to have $25,000 available to help put your child through college once they turn 18, and that you can expect an average annualized return of 7% on your investments.

If you wait until your child is 10 years old to start saving, you’ll need to set aside about $2,100 per year, or about $175 per month in order to meet your goal. If you start saving when your child is five years old, the annual funding requirement drops to just $1,109, or about $92 per month. And finally, if you start when your child is born, you’ll only need to set aside $669 each year, or $56 per month in order to meet your $25,000 goal.

The bottom line is that the sooner you start saving for college, the easier it will be to reach your goal. So, if you’re able to start saving now, it may be a smart idea to not put it off any longer.

Savings And Other Sources

Saving money is a great way to prioritize the financial investment college requires. Because the most effective saving happens over a long period of time, you should plan ahead.

If college is approaching and you haven’t reached your savings goals, consider taking a gap year between high school and college. Working a full-time job can also help you build up your savings account. If you have the privilege of living with your parents or guardians, you may be able to cut down your expenses as well.

Finally, consider investing to grow your savings. This comes with risks, though, which could cause you to lose money. As such, you may only want to invest a small percentage of your savings no more than 10%. Then, maintain the remaining balance in a high-yield savings account.

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Start Early And With Whatever You Can

The most important part of saving for college is investing as early as possible. Since compound interest is interest earned on both the initial investment and the interest you’ve accumulated, your gains will be much larger if you start investing at birth.

You can think about it like this: With compound interest, an initial investment of $1,000 will yield earnings of $100 after one year if there’s a 10% interest rate that’s compounded annually. Your second year, you’ll earn an additional $110 because you’ll be receiving 10% interest on the $1,100 you’ve accumulated.

Kantrowitz recommends the one-third rule as a rough guide for how much parents should be saving: one-third of the cost of a four-year college education will come from parent’s income and financial aid, one-third from savings and investments and one-third from student loans. Once you decide what percentage of your child’s college education you’re willing to fund, you’ll have to figure out how much that will cost you each month.

According to Kantrowitz, about one-third of your college savings will come from your investments if you start investing at birth. However, if you start investing when your child is in high school, only one-tenth of your college savings will come from your investments. In other words, your college savings will be nearly three times bigger if you started investing at birth than if you started in high school.

What You Should Do Before You Start A College Fund

While starting a college fund early is usually better, experts concede that parents should prioritize other financial concerns first.

Preparing for retirement should be a key financial concern for all parents. You might not have the nest egg you need before your child heads to college, but you should be paying at least 10 percent of your paycheck into a retirement fund. If you dont have the savings you need for a comfortable retirement, youll need to keep working through your golden years or survive on small social security payments. Your child has several other options for financing college, like getting a student loan, scholarship, or grant. Studies show the average family uses student loans to cover 20 percent of college costs.

You should also eliminate any major debts before worrying about a college fund. Get rid of your own student loans and high-interest loans, like credit card debt.

Finally, you should build an emergency fund. If something goes wrong, like if your car dies or you lose your job, you need to know you can cover it. Money experts recommend building a nest egg with enough money for between three and six months of expenses.

Only once youve got your own finances in order should you turn your attention to helping your child.

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Late Stage Planning :

At this point is when the cost of an upcoming college education becomes real and fast approaching. We find that its not until now that most parents start to put real thought into how are we going to foot the tuition bill once our child goes off to school. Even for the parents who have planned well for college expenses, there are savings to be had in this stage whether its through financial aid, scholarships, tax strategies, or other avenues. Now is a good time for un-prepared and well-prepared parents alike to really start putting together an actual college payment plan. It absolutely helps when there are some healthy savings to work with but I view putting together all the late-stage planning pieces as the big game and the earlier stages as the practice beforehand. It makes the game easier to handle, but you still have to go out and get a victory .

Consider Money Not Time

Its difficult to give an exact optimum time to start a college fund for your child. Getting into a savings habit sooner rather than later is usually better because you can deposit smaller amounts in regular intervals to achieve your goal. If you start saving later, youll need larger deposits to reach the same goal.

So what goal should you have in mind? Experts suggest parents should save the estimated cost of tuition expected when your child is old enough for college. This can be difficult to estimate as college costs are always increasing. Financial aid amounts also vary. If your child fails any subject or decides to drop back to part-time study, these will also impact the costs. Costs also vary from college to college.

Fortunately, there are many experts researching estimates. CNNs Katie Lobosco estimates attending a two-year community college should cost around $15,120. Students taking on four-year degrees should expect much higher costs. She estimates a public college student living on campus will spend $56,840 to complete a degree, while a student attending a private nonprofit college will spend $104,400.

The U.S. Department of Educations Net Price Calculator Center can provide a more detailed estimate if you know which college your child wants to attend. It takes into account things like tuition, room and board, textbooks, and possible grants and federal loans.

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Deposit Gifts Into College Savings

Your child will probably get cash or gift cards around the holidays, which you can easily move to college savings over time.

Jason DallAcqua, CFP, President of Crest Wealth Advisors LLC in Maryland, says you can even ask family members to make contributions to a college savings fund as gifts for birthdays and holidays rather than buying presents.

“This will go a long way in being able to assist with your childs education costs and family members will feel good knowing they are helping,” he says.

Plus, a financial gift will make a huge difference in your child’s life, whereas many kids don’t really need another toy or video game.

Coverdell Education Savings Account

Coverdells are an alternative to 529 accounts. They are more restrictive than 529s when it comes to contributions, allowing you to add just $2,000 to the account each year and only allowing contributions on behalf of children under 18.

However, Coverdells are more flexible when it comes to withdrawals. You can use the money for tuition and fees as well as expenses like tutors, uniforms and other costs related to K-12 education, in addition to college expenses.

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Invest Your Savings Tax

Nearly 7 in 10 parents arent familiar with a 529 college savings plan and they should be.

Putting it simply, a 529 college savings plan can help your savings go further. Its a tax-advantaged investment account that works like a Roth IRA, offering tax-free growth and tax-free withdrawals. And yes, parents can open a 529 plan for their childs college savings. Its not just for grandparents!

Most 529 plans also offer a passively invested, age-adjusting portfolio option that starts with higher growth investments and becomes more conservative as your child approaches college. This means your money grows over time, but youre also reducing risk as it becomes time to pay for college.

What difference do these tax savings and investment gains make? If you have a 4-year-old child targeting a private university, your monthly savings goal might be $700/month using a savings account versus $400/month with a 529 college savings plan. Thats a big difference!

There are a lot of 529 plan options, but investing doesnt have to be complicated. Here are a few guidelines in case youre doing the research yourself:

When Should I Start Saving For My Childs College Years

Sometimes its good to start planning for the future as soon as possible. When your child is born and youre holding him or her in your arms, starting a college fund is probably the last thing youll be thinking about. In East Germany, the land beyond the Berlin Wall, the only car manufactured locally was the Trabant a box like thing that barely had more power than a lawnmower. The joke was that you needed to register for one as soon as your child was born, since they would need to wait for about twenty years until they received it. So while you dont quite need to hand your baby back to the doctor, rush to your local bank and start a college savings account you shouldnt really delay it for too long. How much will it all cost? And since life is expensive enough, how will you be able to save enough?

The Average Cost

In 2013, the average yearly cost of college was approximately $15,000, according to CNN. This figure takes into account accommodation and food, fees, tuition and books, although it can be somewhat misleading- that cost can skyrocket depending on the field of study, the university in question and the students parental income. But even at the average cost- $15,000 per year for four years sure adds up.

The Basic Way of Saving for College

Letting Your Investments Contribute to College Costs

Other Methods of Saving

Post Authored by Mike

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Roth Individual Retirement Accounts

IRAs are usually thought of as retirement savings tools, however, many families use them as potential college savings vehicles as well. Contributions to Roth IRAs can be withdrawn prior to age 59 1/2 for any purpose you choose without tax or penalty. This includes paying for private school, college or any other form of higher education.

With this strategy, you could withdraw some or all of your Roth IRA principal for college and leave the earnings in the account for retirement. With a Roth IRA, you receive no deduction for contributions, but all earnings are tax-free upon withdrawal. Another option is opening a trust in your childs name.

Have Your Kids Budget And Save For Their Future Education

Emphasize the importance of saving to your children and encourage them to establish their own college savings fund. This will not only give them a sense of investment in the process, but it will also help them see the value of a college education. In addition to having them maintain their own college savings account, consider matching their fund with your own contributions to encourage them to save.

Consider the various savings vehicles available as part of your college financial planning and choose one or more that meet your needs. In addition to savings and money market accounts, for example, you might consider a certificate of deposit , which offers higher interest rates in exchange for a commitment to not access the funds for a set period of time from six months to 10 years. Also balance the benefits of investments, a 529 plan, an ESA, and other types of savings plans. Chances are you will want to use more than one.

Above all, start saving now. The more you can save, the more you can help your children lay the foundation for a successful future, starting with a college degree. If you need advice on financial planning, we can help.

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Commit To A Monthly Contribution

But how much should you be saving right now? Lets assume you are shooting for one-third of the projected cost of college, and youre using a 529 college savings plan to invest your savings and gain its tax advantages over time. If youre saving for a 4-year-old child, here are your estimated monthly contributions.

• Public : estimated $210/month

Better Late Than Never

As mentioned earlier typically the answer to when should I start saving for my kids college? is answered by the sooner the better, but I think the more helpful answer is its better late than never. There are even certain tax strategies that can prove helpful when the student is already enrolled in college. Everyones situation is unique but understanding your situation and having the desire to position yourself as best as possible can be done at any point with your children and their education.

IMPORTANT DISCLOSURE INFORMATION

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Saving And Income Projection

Income varies over a career, and understanding your projected career and salary trajectory helps in knowing when and how to save. After all, the salary you earned at age 24 is likely not the same as what you will earn two decades later. When looking at different ways to pay for your childs education, remember that you will most likely earn more later in life. As your child grows, so should your salary. This may be important when thinking about planning for the entire family. You may also want to consider an online account as a place to safely park your cash. Personal Capital Cash is an online cash account thats easy to use on the web or on mobile devices, and has competitive FDIC insurance coverage. There are also no hidden fees on the account, which is something that traditional bank accounts can often have buried in fine print.

Choosing The Best College Savings Account For Your Child

In the end, it’s up to you to do the research and consider your circumstances. Figure out what’s likely to provide the most benefit while offering more options for the future. And, of course, no matter which type of account you choose, the earlier you start saving, the better off your child will beand the less likely they’ll be to need to use debt to fund their education.

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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 :

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.