Saving for your children’s education is a high priority for many people. With college costs continuing to rise faster than inflation, creating an education savings plan can be complex and challenging. After determining which college savings strategy fits best with your long-term financial goals, the next step is determining when to start saving.
The Early Bird Catches the Worm
As with anything related to investing, starting early is always better because it gives funds more time to grow. Starting right away, however, may not be possible for some parents. As strong as your desire to provide for your child’s future might be, there are some basic things to have in place before you begin saving for college:
- Wait to start saving for college until you have other priorities, such as an emergency fund insurance and your own retirement savings on track.
- Ensure your personal needs are met first – providing for a child’s college education at the expense of your own financial well-being could mean you end up being a financial burden to your child in your retirement years.
After covering these needs, start thinking about saving for college. This can be as little or as much as you want – don’t let the amount hold you back. It might not be easy to start putting money away initially because you may be balancing higher up-front costs, such as new medical needs, financing a family-friendly vehicle, and paying for daycare costs. However, the earlier you start, the more time your contributions have to vest and grow before paying that first tuition bill.
Once your child is 3, the upfront expenses you had will likely be paid off, and you can shift the amounts you were paying toward education savings. When your child hits the age of 5, daycare costs often decline since he or she will be entering kindergarten. Continue the same thinking and reallocate those dollars to the college savings plan. This way, you increase your savings along the way and you can help your child fund some – or all – of their college expenses.
Saving and Income Projection
Income varies over a career, and understanding your projected career and salary trajectory helps in knowing when and how to save. After all, the salary you earned at 24 is likely not the same two decades later.
The Bureau of Labor Statistics reported that median weekly earnings were highest for men age 35 to 64, peaking between ages 45 to 54. For women, usual weekly earnings were also highest for those aged 35 to 64, peaking between ages 35 and 44. Men also tend to earn more than women at every single age group. When looking at different ways to pay for your child’s education, remember that you will most likely earn more later in life. As your child grows, so should your salary. This may be important when thinking about planning for the entire family.
How Much Should You Contribute?
A useful “average” cost for college is $25,000 per year for public schools and $40,000 for private schools. For babies or toddlers, funding about 30% of the expected total cost upfront makes sense if the money is available. $28,000 is a good starting amount because it is under the annual gifting limit. If a monthly program is preferred, contributing $250 a month is a good amount for young children targeting public university.
One of the most common college savings vehicle is a 529 plan. This plan is a state-sponsored, tax-advantaged savings plan – also known as a “qualified tuition plan”- that is designed to encourage saving for future college costs. Because of overfunding penalties and unknown returns, for younger children we recommend targeting 50% to 70% of total college costs be funded by 529s. As children age, a higher percentage can be targeted. You can add more to a 529 without penalty, but it makes taxes more complicated.
Keep in mind though, you should not sacrifice your retirement for your children’s education. You can always borrow for college; you can’t borrow for your retirement. The interest rates for federal student loans – the types of loans your children might take out if they need to – are usually less than what you can make by putting your money in retirement investments.
As with most financial goals, the sooner you take action, the better. Even if you can only afford to add a small amount, like $250 each month, those small amounts eventually add up over time.
If you’re unsure of where you can start saving, speak with a financial advisor who can help you review and analyze your finances and formulate a plan to help you achieve your long-term financial goals.
Personal Capital Education Planning Guide Series
- How to Pay for Kids’ College
- When Does a 529 Make Sense?
- 5 Tips on Saving for College and Retirement
- Three Options When You Have Extra 529 Funds
- Case Study: Funding College While Saving for Retirement
Paul Deer, CFP®
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