You want the best for your children and grandchildren. Now is the time to learn about the options available to help you prepare for the rising costs of education.
College funding takes discipline, effort, and planning. There are many other daily expenses competing for your monthly income so carving out any money for college savings isn’t easy for anyone. Therefore, it is important to start saving for college early so that you can accumulate more.
Let’s compare two hypothetical examples. The Abads and the Safars both want to send their child to a state university whose four-year tuition cost is approximately $40,000. The Abads start saving as soon as their daughter is born, putting away $100 per month in an account that earns 8 percent per year. By the time their child is ready for college, they will have saved $48,749 – more than enough to cover the cost of tuition, plus account for inflation.
The Safars, however, wait until their son is 10 years old before starting to save. Even though they can put away $250 per month in an account that earns 8 percent per year, when he is ready for college eight years later, they have only saved $34,163 – they’ll have to make up the shortfall out of pocket.
These hypothetical examples are for illustration purposes only and do not represent the return of any specific investment; taxes, fees, and other costs are also not considered. But the message is clear: The earlier you start, the less you’ll need to save each month and the more you’ll have put away by the time you send your child off to college.
5 Tips for Funding College Costs
Here are some ideas for how to maximize your college savings.
- Assess your needs. To determine how much to save, you need to estimate the future cost of tuition at public and private institutions. There are a number of handy calculators online that can help you determine this; here is one from the College Board.
- Save early and often. The sooner you begin to set aside funds for college, the less you will have to save on a monthly basis. Allow your investments to grow along with your child.
- Set up a systematic savings plan with automatic paycheck deductions. Try to save on a consistent monthly or quarterly basis. (Please note, such a period savings or investment plan does not assure a profit and does not protect against loss in declining markets.)
- Keep a separate account for college savings. One popular option is a custodial account. These accounts ease the tax burden by allowing parents to shift some of their assets to the child at the child’s lower tax rate.
- Create an incentive program with your child. Offer to match any money the child contributes to their college account. Teach him or her to the importance of saving for the future – they will value their education even more.