College is an investment in your child’s future. It requires a savings commitment and knowledge of funding methods. Having a son that is graduating from college this year, I can tell you that college can be quite expensive. According to the College Board, the average cost of tuition and fees for the 2016–2017 school year was $33,480 at private colleges, $9,650 for state residents at public colleges, and $24,930 for out-of-state residents attending public universities.
I’m asked all the time, “when is the best time to start saving for my child’s college fund?” My answer is always “the younger your child is the better”. That way if you have a savings vehicle with a decent rate of return (at least 4% or higher), the more time you have to earn compounding interest.
Where exactly should I start saving for college? A bank savings account? A cd? US savings bonds? A 529 plan? Investment grade life insurance? Mutual funds? This is a question that you may want to ask yourself. The most important thing to look at when deciding where to start saving for college is the rate of return. The higher the interest rate the faster it will take you to reach your target savings goal.
How much will I need to save annually? Lets say your child is 5 years old and will be attending a four year college starting at age 18. Let’s use $34,000 as the estimated annual cost (includes tuition, fees, room and board, books, etc., using today’s prices). With an assumed 4% rate of return and 3% annual inflation, the total cost of your child’s education (in future dollars) will be $208,889. That means you would have to start saving $12,563 a year. To calculate how much you will need to save use my college funding calculator.
Now that you know how to calculate how much you will need, the next thing to learn is how much interest you will need to earn.
A rule of thumb when investing money is to use The Rule of 72. This is a compounding interest formula that tells you how many years it takes for your money to double in time.
What you do is take the interest rate that you are earning and divide that number into the number 72 and that will tell you how many years it takes for your money to double.
example: 72 ÷ _% = _ years
|72 ÷ 1% = 72 years||72 ÷ 4% = 18 years||72 ÷ 6% = 12 years||72 ÷ 12% = 6 years|
Once you know how much you need and how long it will take to save up to reach your savings goal put an action plan together and start saving as much as you can towards your annual savings goal. Too many times I see parents that wait until their kids are in their last couple of years in high school to start figuring out what they are going to do. This kind of reminds me of those who wait until they have a few years left before they reach retirement age to start thinking about what to do. By then it’s practically too late.
I hope this article helps. Feel free to comment below. Also see my College Saving and Funding Strategies Flipbook.