It’s never too early to think about college savings for your children. Helping pay for college is a valuable gift: being able to graduate college with no or minimal student loans can be a huge advantage for starting life off on the right foot.
Begin by considering how much you want to offer to pay. Will you want to foot the whole bill, or have your child contribute part? With this in mind you can formulate a savings plan.
You can get a good idea of what you will need to save to pay for college by plugging some numbers into this college cost calculator. Basically, you want to look at how much tuition costs at a particular school, then factor in the average rate of inflation (5-8% is a good range based on history) and the number of years until college. Determine the return you expect to make on your investments for the number of years until the money will be used. With these numbers, you can calculate how much you need to save every month in order to achieve your goal.
DIY or Work With a Professional?
To help determine this, ask yourself the following questions:
- Are you already confident in making investment decisions or do you have the time and interest to learn?
- How will you react to market falls?
- Will you be able to monitor the investments on an on-going basis?
Investing College Savings
You can always just put your money into a simple savings account and let it accumulate, but you will miss out on the power of compound interest that investments offer, which can be a substantial amount! Also, keep in mind that financial aid is determined based on income and assets from the year prior to applying for aid, so students with sizable savings in their name could end up missing out on a lot of money.
There are several college savings plans, including state based funds, or other state based, pre-paid tuition options, Coverdell Funds, UTMA or UGMAs depending upon your state, or a 529 plan. It’s important to look at your specific situation and research what the best option would be for you. If you’re not sure, talk with a professional advisor to be sure that you are making the best decision for your family.
Once you decide on the type of educational investment account, you will then need to decide on the actual investments you want to put your money into.
Within every investment account, you have different options on the types of investments, which vary from program to program. When it comes to investing for college, it’s common for the level of risk to be based on the age of the child. For example, a baby has 18 years for their investments to grow, which means they can stand to be in a riskier investment. If your child is 15 with college just three years away, in general the investments should be more conservative.
Teach the Children Well
Helping your children develop a healthy perspective of money will be one of the most useful lessons you can teach them. Discuss with your spouse how you plan to teach your children about personal finance.
When the time comes, give your children age appropriate opportunities to start managing money. It’s important to allow them to experience the ability to save for something as well as the pinch that comes from having spent all their money.
As college approaches, help students explore financial aid packages. Guide them in creating a budget for while they are in college as well as a projected budget for when they graduate. It helps give perspective to student loan decisions when your child can see how their financial decisions now will affect their life in a few short years.
The sooner you begin planning, the easier you will make it on yourself to provide the help you want to give your children as they enter college. A little research and planning offers a great return on investment.