It seems like just the other day my wife and I were bringing the kids home from the hospital. Then came the skinned knees with the first bicycle attempt, and now there’s talk of college. I’m sure many of you can relate to this—of time going by too fast. And if you’re currently not faced with conversations about college, trust me, you will be sooner than you think. Planning and saving for college can be overwhelming, so starting early is vital.
The first step to saving for college is to have an idea/goal of how much you need/want to save. Recent studies report that the average college cost is around $15,000 a year for tuition, books, fees, and room and board. But this number is just an average, so I suggest looking online to learn more about the tuition rates at the schools you’re interested in. You will also need to account for an increase in cost as the years go by. A good rule of thumb is to expect an increase of 4-6% per year.
The second step is to understand that the more you invest and the earlier you start, the more your money has the opportunity to grow. Many of us may feel that saving this amount of money is impossible and therefore hope for scholarships or think about utilizing student loans. Although this number can seem like a lofty goal, it’s not impossible, if you start early.
An effective way to ensure you’re planning ahead is to find a dollar amount you can consistently afford to contribute each month. Set up your account to automatically transfer this money each month into your college savings fund. Not only does this practice ensure action each month, it also allows you to think of this money as already “spent.”
Let’s look at an example. Here is a graph that represents how monthly contributions can grow over time. This graph assumes you make an initial contribution of $2,500 with an annual investment return of 6 percent with no withdrawals. You can see that the sooner you start, the sooner you can take advantage of the compounding effect of time on your investment.
Helping your children plan for college is a great way to help them spend life wisely. Start today by thinking through the two steps we’ve covered—how much needs to be saved and how much you can afford to set back each month.
In future posts, I’ll share with you additional steps to accomplish your college savings goals. Watch for topics related to different plan and investment options, possible tax advantages, and other issues facing our children’s futures, such as the detriment of student loans. Or, feel free to contact me and I’ll be glad to answer your questions and help you one-on-one.
Don’t wait until the future to plan for the future!