When I went to college, private tuition was in the $20,000/year range and I remember people saying that it was impossible that families would be willing to spend more than $100,000 total on college. Well, tuition rates are well beyond that and it's a daunting matter. Today, contributor (and financial professional) Sandra Gilpatrick shares 4 key tips for how to start saving for college (also be sure to check out Sandra's article on how to teach kids to budget!):
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If you are planning on paying for your child's college education, it will likely be one of your most expensive goals. How do you tackle this financial monster? Here are 4 tips to help you get on your way.
1. Get compound interest on your side! If you can put smaller amounts toward investment earlier, you can make compound interest work for you. Click on my quick video explaining compound interest to learn how it can help you reach a future goal, like college tuition. The longer you wait to invest for college, the more you’ll miss out on compound interest, and will need to make larger deposits later in order to make up for lost time. But remember, if you owe money (e.g., credit card), this same concept can work against you. If your credit card has an interest rate of 20% (compounding monthly) on a $20,000 debt you would pay over $4,000 per year to the credit card company.
2. Flip small moments into opportunity. When my son lost his first tooth, I didn't research the tooth fairy’s going rate. I expected that inflation had increased the amount from a quarter when I was a child, so I asked him to choose between one dollar now or $100 invested in his college investment account, a 529 plan. Without hesitation he chose to have $100 for his lost tooth invested toward college. I asked him why and he said, “Saving now will put me ahead.” That’s a simple summary of compound interest. Twenty teeth will discipline me to invest an extra $2,000 in his 529 plan, and assuming a 7.5% rate of return on $2000 for 10 years, you would just about double college funds available to $4000 (you can use the Rule of 72 for quick estimates). My son astutely asked if he would get more for his larger molar teeth. I may use that occasion to increase my funding!
3. Start as soon as you can. As with most financial goals, the earlier you start investing, the more time you have to take advantage of compound interest. Today a typical private New England college costs around $63,000 per year. That is only tuition, room, and board, not all the extras. According to collegesavings.org, if you have a 7-year-old, the current annual increases will translate into about $102,288 yearly tuition beginning ten years from now (i.e., his or her freshman year in college). If you start saving when your child is a baby, investing about $10,380 per year or $858 monthly will get you toward your goal. If you wait until age 9, however, you'll need to almost double your annual investments to $18,391, or $1,532 per month.
4. Make investing a family affair. When I was pregnant, I started a 529 plan with myself as beneficiary, and changed my son to the beneficiary once he was born. In retrospect, a 529 plan contribution would have been a wiser baby shower request than most of the gifts I didn’t use for more than five months. I’ve been encouraging my son’s grandparents to contribute toward his college, instead of buying him toys for his birthday and holidays. Admittedly, it's not the easiest battle to win, but I've made some progress!
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Are there specific financial topics you’d love to see Sandra address? Drop me a line at email@example.com to let me know!
To learn more about Sandra, visit SandraGilpatrick.com. Third party posts on this profile do not reflect the views of LPL Financial and have not been reviewed by LPL Financial as to accuracy or completeness. Securities offered through LPL Financial, Member FINRA/SIPC.
Image credit: piggy bank via FreeDigitalPhotos.net; large graphic by Christine Koh