Saving money for a child’s college education is one of the top priorities of many families. As the cost of college tuition, boarding etc increases at a very fast pace it is crucial to put a plan in place to be able to send your child to college.
A few important questions arise while going through this process. what is the right age to save money for college? Where should you begin? And lastly, how much should you save for college?
The simple answer to all these questions is - the sooner, the better!
Saving for college can be an overwhelming process, but it is essential to start saving from your child’s early age so that you can reduce the student loan debt. Here are a few strategies that can help you decide how much to save for college education and help your child graduate debt free. Let’s dive in deep!
One of the very first steps toward saving money for college is to keep an end goal or milestone in mind. You can use online calculators to help provide a more personalized projection of the future cost of college based on various factors such as child’s age, the type of school you expect your child to attend (including private, community college, in-state college or out-of-state college) as well as a projected rise in the cost of college education. These calculators are designed to provide estimates on the total scholarships and grants that you may receive based on your household income.
Needless to say that the estimated cost may seem quite daunting but don’t worry! You don’t have to save for the entire cost. But instead, you need to follow the 1/3 rule and shoot for one-third cost only.
Many financial advisors recommend saving one-third of the total cost of college expecting that the rest of the amount will be taken care of through various other options such as scholarship programs, financial aid, fellowships and assistantships, your current income or student’s work-study aid, etc. Simply, following the one-third rule will help you save money for college in a more realistic and practical way.
According to historical college cost data, on an annual basis, education inflation is about 10-12 percent. Even going by a conservative estimate, the education cost inflation is somewhere considered between 6-7 percent annually. So, it is critical to manage your savings and invest wisely to be able to meet the cost of your child’s college education.
Many financial experts recommend a 529 college savings plan as one of the best options for parents who intend to save for their child’s college education as well as grow their savings. A 529 plan is a tax-advantaged investment account that works like a Roth IRA for college. It allows your money to grow tax-free and even allows tax-free withdrawals for qualified higher education expenses including tuition and fees, books, rooms, computers, and special education expenses. Once you get started, you can quickly increase your monthly savings to the 529 plan. Another added advantage of the 529 plan is that there is no income limits or restrictions based on age.
How much to save right now? Isn’t this question doing the rounds in your head? One of the points to remember is that how you save now will directly impact the amount you will have at the time when your child starts his/her college.
So, let’s assume that you are saving towards the one-third of the estimated cost of college and you are also investing in the 529 college savings plan and receiving its tax advantages over time. So, if your child is 4-year-old, then your estimated monthly contributions will be $210/month for Public (in-state); $330/month for Public (out-of-state) and $415/month for Private. If you invest in a traditional savings plan or taxed investment account, then your contribution per month may get doubled. With a 7 percent return, you may yield better returns on your savings using taxed investments, but you may miss out on the 529 plan’s tax exemptions on dividends and gains.
To achieve the milestone that you intend to save for your child’s college education it is essential that you break down the big number into small monthly contributions – based on your state, household income, child’s age as well as existing 529 savings plan and then commit to investing on a monthly basis to grow your savings into a respectable sum.
While it is a great start to save money, remember that you can achieve your long-term goal only when you stick to the monthly plan. Save as much as you can for your child’s college education but also make sure that you are managing and taking care of your other priorities like saving for retirement or building a contingency fund, etc. Since every family is different and so are their needs and their affordability, so it is essential that you reconcile your income and choose an amount which fits into your monthly budget comfortably. As a general rule, many families save 10 percent of their discretionary income. Your discretionary income is the total after-tax income minus the necessary monthly expenses including housing, food, medicine, insurance, transportation, etc.
Also, it is a great idea to sit with your family and understand how everyone can contribute to this fund. You can also ask your close relatives to give small contributions that can be saved for the college fund instead of gifts during special occasions like birthdays, holidays, and other personal milestones.
Final thoughtsEmbarking on the college-saving process is a daunting but crucial process. Remember that investing early and timely will make a significant impact on your child’s future education. Whether your child is a toddler or teenager, it’s never too late to start a college savings plan. And the best time to start is now. If you don’t have a plan yet or are still unsure about which strategy to choose, Find a financial advisor today!
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