Saving for a child’s future education costs is a high priority for many families. With college costs continuing to increase, creating an education savings plan can be complex and challenging. After prioritizing your financial goals and ensuring you are on track for everything with a higher priority, the next step is to determine how and when to save for education expenses.
The Early Bird Catches the Worm
As with anything related to investing, starting to save for education expenses early is always better because that will allow more time for potential growth on your investments. 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:
- 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 as new parents, such as new medical needs, financing a family-friendly vehicle, and paying for daycare costs. However, the earlier you start, the more time your savings will have to grow before paying that first tuition bill.
Once your child is 3, those initial expenses you had will likely be paid off, and you redirect that cashflow towards 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 you were spending on daycare into education savings going forward. 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 age 24 is likely not the same as what you will earn two decades later. 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. $30,000 is a good starting amount because it is under the annual gift tax exclusion (for married couples). If a monthly program is preferred, contributing $250 a month – if you start when they are born – 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 there are potential pitfalls.
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.
To learn more, read the free Personal Capital Guide to Saving for a Child’s Education
Any reference to the advisory services refers to Personal Capital Advisors Corporation. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.
To learn more, read our free guide on saving for a child’s education.
Gregory DePalma, CFP®
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