Having children brings about many changes in your life. One of the biggest is the fact that you are now thinking about how you will provide for your child and meet all of his or her needs both now and in the future.
One of the biggest expenses that any parent will ever face is paying for their child’s college education. It is estimated that over half of all children do attend college which is good news for all children.
The NCES estimated that students who have a college degree earn an average of 66% more than those with just a high school diploma. But your dilemma still remains, when should you start saving for college and how much should you save.
When to Begin`
Ideally, parents should begin saving for a child’s college education before the age of five. The idea behind starting so early is to take full advantage of the compounded interest. Just take a look at these few basic numbers and you will see the benefit time offers when calculating interest. If you save just $1,000 a year starting when your child is five and manage to average 8% interest for thirteen years, your child will have over $20,000 for college tuition at age 18. What you are basically looking at is finding a way to save $85 a month for the next 13 years. That is less than most families pay for cable tv but it can result in a substantial savings account for your child to pay for college. In addition, you can ask relatives to contribute to the account in place of some holiday gifts and greatly increase your child’s college fund.
How Much Will College Cost
The cost is going to vary greatly depending on where your child decides to go to school. You can begin with some rough numbers when your child is young and then fine tune as they get older and begin to express interest in different schools or different career paths. It is commonly known that in state tuition is much cheaper than going to school out of state and you can even reduce the cost of an in state college by completing the first two years at a community college. Just to look at the cost of tuition and fees for the 2016-2017 school year, a four year in state school was around $10,000 per year. And that is not including the addition $10,000 that room and board would cost. A public out of state school would be around $25,000 for tuition and fees and another $10,000 for room and board. If you are looking at a private school then expect to pay almost $35,000 for tuition and fees and room and board on top of that.
How Much Does That Mean Each Month?
As stated before, around $85 a month for thirteen years can add up to a college savings account of around $20,000. But you can also see that $20,000 will not pay for a four year degree program. No one knows what their child will want to study or where they will want to go to school when they get older, so you need to begin early and think in general terms. The biggest factor is to find an amount that can work within your current budget. It really won’t help if you try to set a goal so high that you are only able to set aside the money every few months. Start small and understand that you can increase your savings as the funds become available. Some parents choose to allocate half of each raise to increasing their child’s college fund. Others elect to add bonus money or use part of their child’s holiday and gift money to increase the college fund contributions.
What Plan Will Provide a Good Interest Rate?
Many parents turn to their financial advisor for suggestions on the best way to set up a college fund for their child. The most common answer is to start a 529 savings plan. This is essentially a Roth IRA for college tuition. You can invest up to $14,000 per year in the account and the money is invested post tax. The benefit of this plan is that the money you invest grows tax free in mutual funds. When you withdraw the money, you owe no taxes as long as the money is used for educational expenses. The plans vary slightly by state so you will want to investigate the options that are available where you live.
How Can You Make Up for Lost Time?
If you are0 unable to begin saving for your child’s college fund until he or she is older, don’t be discouraged. Many parents are unable to afford to save for such a far off expense when they are still paying for daycare or other child care expenses. If your child is ten, then figure that you would want to double the monthly savings if possible to $170 a month to get close to the target number of around $20,000. And likewise starting at 15 would require that you save about $400 a month. But don’t get too caught up in how late you are starting. The important part is that you are beginning a college fund for your child. You never know what could happen in the coming years and how you might be able to increase the amount that you are tucking away in a college fund.
The Bottom Line
The most important thing to remember is that time will greatly increase the final total that your child will have in their college fund. If you can begin early but maybe can’t save the full $85 don’t worry. The added time that the interest accrues will be a huge advantage over waiting to begin saving. Keep the amount reasonable and doable within your current budget and revisit the amount and increase it when more money is available. The most important part is that you start saving for college as soon as you can and continue on a regular basis.