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It’s Never Too Late to Start Saving for College

When your child starts high school, you may eagerly anticipate the next four years — but remember, they go by in a blip.

With the start of high school comes a whole new slew of questions — how much will college cost, and what should you do if you haven’t saved a dime?

Even so, it’s important to remember that even though you may not have saved for college as early and often as you wanted to (those pesky mortgage payments!) you can still save for college starting in high school. You can even make some pretty serious headway with your child’s college savings.

This is one area in which “it’s never too late!” really does ring true. Let’s take a look at some scenarios and also some steps you can take to get started.

Why Save Now, When College is Just Around the Corner?

You may wonder why you should stress yourself out to save for college at this point. However, there’s a whole host of reasons you may want to consider it. Let’s go over the reasons it might make sense for your situation.

Reason 1: Your child may not have to take out as many loans later on.

About 42% of students at four-year public universities finished their bachelor’s degree without any debt. About 78% graduated with less than $30,000 in debt. On the other hand, 4% of public university graduates left college with more than $60,000 of debt, according to the Association of Public and Land-Grant Universities (APLU). Students who carry $100,000 in debt represent less than half of 1% of all public university graduates.

If you want to limit the amount of debt your child takes on after graduation, you may want to consider saving — even if it amounts to just a few thousand dollars less of debt than they might have taken on.

Reason 2: Your child will more likely attend college.

What if you could set up a savings account in your child’s name and it would be more likely that your child would attend college? Turns out, that’s actually the case. The Center for Social Development at the George Warren Brown School of Social Work at Washington University in St. Louis found that children who have college savings accounts are about six times more likely to attend college compared to children who don’t have an account. In fact, race or parent net worth didn’t have as much bearing on whether children would attend college.

Putting an account together for your child can make a huge difference in whether he or she attends college.

Reason 3: Your money can grow.

You don’t have to put your money in a savings account that won’t earn interest. If you refer to any financial institution’s blog, you’ll see that the stock market averages about 10% return and it has since the 1920s.

In fact, let’s take a look at a few scenarios.

  • Let’s say you start with $100. You invest $500 a month for four years and earn a 4% rate of return. At the end of four years, when your child is a senior, you’d have $26,097.
  • Now, let’s bump up the rate of return. Let’s say you start with $100 and invest $500 a month for four years. Let’s say you earn a 6% rate of return. You’d have $27,176 by the time your child started college.
  • Let’s say you invest your $100 seed money, then contribute $500 to it every month for four years. This time, you earn an 8% rate of return. You’d have $28,313 by the time your child goes off to college.

What if you wait until your child’s senior year of college, with the goal to pay off that year of college? Let’s say you do the exact same thing. You invest that initial seed money of $100, then add an additional $500 per month, but instead, wait seven years for it to gather interest at 8%. You could have a whopping $56,231 at the end of that amount of time.

Of course, you can always invest more. Let’s say you decide to invest $1,000 per month. If you start with $100 and invest $1,000 per month at an 8% rate of return, then you could reach $56,487 in four years.

As you can see, the options are endless. You just need a good college savings calculator to figure out how much you want to target, how much you want to save and how much that will help you over the course of four years or longer.

Steps You Can Take to Invest Now if Your Child is in High School

One of the most difficult things about investing for the future involves — you guessed it — actually choosing the right investment. Sometimes, parents spend more time stymied by this than actually moving on their investments. It can be intimidating because you have so many choices at your disposal.

Step 1: Choose the type of investment you want.

You can technically invest in whatever you want to save for college. You could save for college by putting your money in a savings account. However, if you’re looking forward to seeing your money grow, you might want to consider investing in an account that offers returns.

You can choose from the following options, for example:

  • 529 plans: A 529 plan, a college savings plan sponsored by a state or state agency, can be used to pay for tuition, books and other qualified expenses. Many people opt for these plans because their state may offer tax benefits and you can arrange to invest in a number of account types. In addition, contributions to a 529 plan grow tax-free and when you take the money out to pay for college, they remain untaxed.
  • Custodial accounts: Custodial accounts, also known as the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), depending on your state, allow you to invest money for your child. You can use the gift tax exclusion but the drawback to a custodial account is that your child can take the money out and spend it however he or she wishes when she turns a certain age — whatever the age of majority is in your state (18, 21 or 25 are usually common ages).
  • Coverdell ESA: This type of trust or custodial account helps families by offering tax-free earnings growth and tax-free withdrawals on qualified educational expenses.
  • Certificates of Deposit (CDs): CDs offer a fixed interest rate on savings from a bank, thrift institution or a credit union. You will earn a specific amount of money in return but you’ll pay a penalty if you take the money out earlier than the time designated on the CD itself.
  • Stocks: Stocks represent an ownership share of a company. If you own one share of stock, you own a fraction of ownership, or one share of a company. Stocks by themselves can be a risky investment, so tread wisely if you think you may want to invest in a single company.
  • Mutual funds: Mutual funds refer to many investors who pool their money together to invest in a bundle of securities. Mutual funds offer a more diversified investment than stocks.
  • Roth IRA: A Roth IRA is a tax-advantaged account that people under a certain income threshold can use to save for retirement. However, you can withdraw from a Roth in order to pay for qualified educational expenses tax-free. However, if you’ve had the Roth IRA for less than five years and you withdraw not just the principal amount contributed but also the earnings to pay for college, you’ll pay tax on those earnings.

Read More: 529 Plan vs. Roth IRA: Which is Better for College Savings?

What’s the best way to save? Only you can answer that. You can choose from more options other than just the ones on this list.

When you choose, consider your risk tolerance. You may only have four years to invest, so which option works best for you? Since you don’t have a lot of time on your side, you may want to consider a middle-of-the-road investment — one that doesn’t cause you to lose your entire investment, since you don’t have a lot of time to recover in the markets, but also one that does earn you a decent return. You may want to consult with a financial advisor for more information about your options based on your risk profile and investment timeline as well as which investments offer the best tax advantages for you.

Step 2: Set up your investment account through a brokerage.

You’ll need to choose a brokerage account (or a financial advisor can set up your account for you). Most of the time, you need very basic information to get started with an online brokerage — your name, identification and Social Security number. You’ll also give the brokerage your bank account information. Next, you’ll fund the account using an electronic funds transfer, wire transfer or check.

Step 3: Make your investment automatic.

Perhaps the most important part of the process, we recommend making your investments automatic. In other words, make sure you tell your brokerage or advisor exactly how much money you want to invest. If you want to stick to an investment of $500 per month, setting up an automatic investment will ensure that you reach that goal each and every month.

You can also choose the best time of the month for your money to pull into your investments. For example, if you choose to invest in a mutual fund, you can instruct your brokerage to pull $500 out of your account on the first Friday of every month, which may directly align with your paycheck.

Step 4: Check back on your investments.

Know what your investments are doing over time. If they’re not performing or you’re concerned about the way you’re invested, keep tabs on them. You may need to change your asset allocation. Remember, you don’t have a lot of time — but you still have enough time to make an impact.

You Can Start Saving Now

We’ll say it again: It’s never too late to start saving.

If you’re really struggling to know how much you can save, you can prepare for these expenses with Personal Capital’s free finance tools. Millions of parents use these tools to create savings goals, formulate budgets and plan for big-time long-term expenses like college tuition.

In addition, learn more about how to save money on college visits.

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Personal Capital compensates Melissa Brock (“Author”) for providing the content contained in this blog post. Compensation not to exceed $500. Author is not a client of Personal Capital Advisors Corporation. The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Melissa Brock spent 12 years in college admission and is the founder of College Money Tips. She also writes financial content and loves helping families navigate the college search process.
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