There are many things to worry about as a parent, but college savings for your child doesn’t have to be one of them. In 16-18 years, hopefully you will have put something aside for your child’s future tuition. However keep in mind that your child will most-likely receive some scholarships and grants as well, so the entire amount of college tuition will not come from your pockets alone. Nevertheless, it is best to prepare rather than to fall short later and have your child weighed down by tons of student loans.
How much should you save?
The short answer is, it depends. The factors surrounding which college your child will want to attend, inflation costs, costs for books, living expenses, etc all are unknown now. Therefore, from one parent to another I am sharing how to get a good practical start.
For starters, I believe if you can put at least $2,000 aside or more in a tax-free savings account like a 529 plan or a state/federally backed tax-free mutual fund, when your child is born then you will have compound interest on your side. Of course these amounts are not etched in stone, but will help lessen the costs later. The key is to put as much money aside upfront as you can and your money will grow and expand at a much greater rate than if you started later on in life. Some plans will require that you contribute at least $25 monthly.
Don’t Forget about You?
Next, I think parents should focus on funding their retirement plans continually because their kids can get money for school through scholarships, grants, fellowships, etc., but parents will probably not get money from the sky to live off of when they can no longer work. Also note that certain retirement accounts allow people to withdraw from their retirement accounts for higher educational expenses without being penalized. If they can fully fund their retirement accounts now, the more money they will have later.
For example, if parents in their twenties put aside the maximum or at least 15% of their checks into retirement accounts now, by the time they will need it, realistically around 70, their money would have already made money.
How can you save practically?
In order to save practically it is important for you to live within your means so you have money to save. My motto is “sacrifice a little and save a lot.” One way for people to save more is to eliminate an expense that is optional. For us, we chose to eliminate cable. With the money we would pay for cable we just add it into a savings account. Some other options to find extra money for saving are to eliminate eating out for lunch, morning coffee, new outfits every week, etc. If this doesn’t fit your situation, you could also start couponing and putting aside your added savings into the bank. So at the end of a receipt if it says you saved $25, put that money into a savings account.
What is Compound Interest?
Compound (is composed of two or more parts), so Compound interest is interest earning money on principal and interest accrued together; basically, it results in your interest growing interest. Compound interest grows “at a faster rate than simple interest, which is calculated as a percentage of only the principal amount.” (investopedia.com)
According to Wes Brown “It is imperative to stress the importance of starting now. You can never catch up, even if you double the contribution for half as much time.”
Economic and Personal Finance Resource for K-12 has a compound interest calculator and breaks down the concept in simple terms.
What is a 529 Plan?
“A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1996 . . . As long as the plan satisfies a few basic requirements, the federal tax law provides special tax benefits to you.” (Saving for College.com)
“When you set up a 529 or alike one strategy is to use target date funds. This is a category of funds that will automatically change the mix from mostly stocks in the early year to mostly bonds as you get closer to the target date. Using this strategy will help to avoid the risk posed by market corrections and other uncertainty.” (Wes Brown)
Most states have their own tax-free college college investment plans?
You want to find a plan that does not tax the interest you are accruing. Here is a link to some states plans:
There is also Upromise which can help you save as well. It is a site that rewards you for your purchases and couponing with college savings in mind.
CollegeEducationCost.com is also a great resource that will help you decide how to plan for your child.
Want to know more about college savings? Check out CNN Money : Money 101 saving for college