- When Should You Start Saving for College?
- The Order of Operations for Saving for a College Education
- Other College Savings Options
- How Much to Save for College Per Child?
- Where to Open a 529 College Savings Plan
- Tips for Saving for College
- Save What You Can – and Don’t Forget Financial Aid
Wondering how much to save for college? Whether you have one child or five, that’s likely a question that’s crossed your mind from time to time – and likely kept you up at night if you think you aren’t saving enough.
Knowing how much you should save will depend on a variety of factors, such as where your child wants to go to school, the cost of college, and the age of your child. Of course, you’ll have to take your own income and budget into account, too (especially if you are paying for your own college).
However, there are a few tips you can follow to help give you a rough estimate of how much you should be stockpiling. Below are some pointers.
When Should You Start Saving for College?
When should you start saving for college? College is expensive, so ideally, as soon as possible. Parents should begin saving for their child’s education as soon as they find out that a child is on the way, if possible, but certainly whenever it becomes possible financially.
Of course, you don’t want to neglect your other financial needs and goals. You have bills to pay and your own money milestones to shoot for. You might have a mortgage to pay off or a retirement plan to fund. Before you start saving for your child’s college, make sure you have done the following:
- Paid off any student loan debt of your own
- Put 15% of your income toward retirement savings
- Set up an emergency fund of 3-6 months of expenses
The Order of Operations for Saving for a College Education
When it comes to saving for your child’s education, there’s no linear progression or set of steps that every family should follow. The process will be unique for everyone. However, it may help to consider this common “order of operations” when you begin thinking about the process.
Figure Out Your Own Finances First
Before you start saving money to pay for your child’s education, make sure your own finances are in order. If you’re struggling to pay the rent or are completely underwater on your mortgage, it’s probably not going to make a lot of sense to start contributing money to a 529 account. Fix your other financial issues first – and make sure you’re saving for your own retirement, too, before you start planning for your child’s future.
You’re not being selfish by thinking of yourself – you’re being smart. Make sure you have all of your ducks in a row before you begin saving for your child’s college education.
Use a Calculator
There is a wide range of how much you need to save in your 529 or other college savings plan based on where your child will ultimately go to school – and where they will attend. On the low end, some experts recommend having about $10,000 saved by the time your child is ten years old, while on the high end, that number might be closer to $65,000.
There is a lot of variation here and a lot of factors to be considered. Meeting with a certified financial planner will be your best bet in deciding how much to save but that might not always be possible. Consider using a calculator like this one from Fidelity that will give you an idea of how much you need to save.
Set a Savings Goal – and Commit
The scariest part of beginning to save for college is not knowing how much you can reasonably set aside for college. Many people assume that they will need to save 100% of their child’s educational costs – that’s not the case. You won’t need to pay 100%, as financial aid will chip in and so will the interest accrued on your college savings account.
Decide as a family what your college savings goal should be. Do you want to be able to contribute to all four years of your child’s education? Will you stop contributing when your child is 18? Maybe you will only save enough to cover in-state tuition – and the rest is on your child. Also have a plan in place in case your child decides not to attend college at all – having clear savings goals and fallback plans is important.
Once you know how much you’d like to save, both by having the conversations mentioned above as well as by using a calculator, you need to set a savings goal. This can be an annual goal but you may have an easier time meeting your goal if you break it down into monthly mini-goals, too.
Bear in mind that, in addition to saving for your child’s education in a college savings account, you should still be saving for yourself and for your family in other ways. You’ll want to have an emergency fund established and maintained and perhaps consider saving in a traditional savings account or retirement plan as well – just in case there are other expenses you will need to pay for in the future, either unplanned or planned.
Open a College Savings Account
Your next step is to consider opening a college savings account. Once you’ve saved some money for yourself, you can start contributing to a college savings account. By far, in the United States, the most common way to save for your child’s education is with a 529 college savings plan. There are other options, of course, too, which we will walk you through in this article.
529 College Savings Plan
529 plans will allow you to save the most amount of money for your child’s education and they do not have any income limits. It doesn’t matter how much or how little money you make.
There are some considerations to be made when investing in a 529. For example, you should not use one that changes your investments based on the age of your child or freezes your options in any event. You should also look for one that will let you change your beneficiary to another family member, say, for example, if your first child decides not to go to college.
In most states, contribution limits vary, but you can often contribute up to $300,000. It grows tax-free and there aren’t income limits or age-based restrictions to deal with.
Other College Savings Options
A 529 plan is far from the only option when it comes to paying for college. Here are some other ways you can save, either in combination with each other or by themselves.
Education Savings Account (ESA)
An ESA, or an Education IRA, is not quite as common as a 529 plan but it will allow you to save $2,000, after tax, per year per child. The account grows tax-free and while the rate of growth will depend on the investments in the account, you’ll earn a better return on your investment in one of these accounts than you would in a regular savings account.
Plus, you don’t have to pay taxes when you withdraw the money. There is, however, an income limit for ESAs – high earners may not be able to contribute to these sorts of accounts.
UTMA/UGMA (also known as Uniform Transfer/Gift to Minors Act) is different from ESAs and 529s in that they aren’t just for education savings. These accounts are usually held in a child’s name but controlled by a parent or grandparent until the child reaches the age of 18 or 21. Then, the account transfers to the child and can be used any way they’d like.
For the contributor to one of these accounts, there are serious tax benefits – plus, the funds can be used for more than just college expenses.
Upromise is a free service that is meant to help families pay for college through their regular shopping. When you link your credit or debit card to Upromise, you’ll get cash rewards (anywhere from 1% to 25%, depending on the retailer!). Some members earn up to $1,000 per year – that’s a 529 contribution all in itself! It’s easy to sign up for Upromise and there are no gimmicks or strings attached.
Saving Birthday or Gift Money
Let’s not overlook this classic method of saving – putting money in a piggy bank! Encourage your child to save all of his birthday and holiday money. Of course, that money can stay in the piggy bank, but a better option is to put it toward the 529 contributions or another account that will accrue interest and dividends so it’s working toward a final savings goal.
Take a Look at Your Income and Budget
Are there any ways you can trim your budget or increase your income? This sounds obvious (you might be thinking, obviously! If I could make more money, wouldn’t I already be doing it?) but it’s important to consider. Even adding just $100 to your income each month can make a huge difference – that’s 100 extra dollars you can put away for your child’s education.
How Much to Save for College Per Child?
For most people, the general consensus is that you should have between $37,328 and $245,427 saved for your child’s college education. That’s a huge range and again, will vary based on your finances, how many children you have, and where they intend to go to school. Of course, the more children you have, the less likely it becomes that you will be able to save on the high end for all of them.
Remember that even when saving for a private school, many (if not most) students who attend receive discounted tuition or scholarships to offset the “sticker price” – so that “high end” number might not even be necessary.
Do keep in mind that college costs will likely rise, so you should want to have at least 50% of a four-year p public school’s annual tuition saved for 18 years.
Where to Open a 529 College Savings Plan
Once you’ve decided that opening a 529 college savings plan is right for you, it’s time to open one up! You can invest in almost any state 529 plan, but it makes the most sense to use your own to take full advantage of the tax deduction. Most states offer tax deductions on 529 plans, but not all do (California is an example of a state that does not).
You’ll also want to consider the performance of the account and how easy it is to save and contribute to it. Look for an account that offers good performance and low fees. Again, meeting with a certified financial advisor can help when it comes to making the best decisions for how to spend and save your money.
Tips for Saving for College
Follow these tips for saving for your child’s education – it doesn’t have to be overwhelming!
1. Take Baby Steps
Again, most people assume that they have to front the entire cost of their child’s education. When you realize that tuition at some private universities can easily top $30,000 a year, it’s enough to induce a sweat in even the most level-headed savers.
Don’t get sticker shock. Set your sights a bit lower. You don’t have to save the whole thing – in fact, you’re doing your child a huge favor by saving anything at all. Consider how much you need to save per month instead of one big lump sum. If you start saving as soon as your child is born, you will only need to save around $30 for every $10,000 in college costs.
2. Follow the ⅓ Rule
This rule of financial management is based on the theory that people seldom pay for a major expense in a lump sum – instead, they spread costs out, combining debt and savings with existing income. You might pay a third of the costs of college from your savings, a third from your income when your child is currently attending school, and a third from future income (loans).
This ratio will give you an easier way to conceptualize paying for your child’s education – and if you are really hesitant to take out student loans, remember that financial aid can (and often does) take their place.
3….or the 3xx Rule
The 3xx rule is another helpful principle to follow when saving for college. It involves the idea that the cost of a college education will roughly triple over a 17-year period, from birth to the time of enrollment. That follows an inflation rate of around 6.6% – this can be a helpful tool to help you gauge how much you should be saving.
4. Don’t Be Afraid to Adjust as Needed
You might not be able to meet your full savings goal for college each month. Some months are inevitably going to be tighter financially than others. That’s okay! Don’t be too hard on yourself if one month, you’re only able to save $50, but the next, you can save $300. It’s all about balance and doing whatever you can – every little bit will help.
5. Make Sure Your Child is Involved, Too
If your child is older and able to be involved in the savings process, make sure you explain to him exactly what is going on. See if there are ways your child can get involved in saving and paying for his own education – can he mow some lawns? Sell a favorite baseball card? Again – every little bit counts!
Save What You Can – and Don’t Forget Financial Aid
Although it would be nice to be able to save hundreds of thousands of dollars to go toward your child’s education, the reality is that, for most families, that is not possible. You have to keep the lights on and the refrigerator stocked, after all!
Save what you can and don’t stress about the rest. Remember that you don’t need to save for the full cost of college attendance for your child – interest and dividends will take care of their rest if you follow one of the savings plans outlined above.
Plus, there’s always financial aid. Even if your earnings put you into a bracket in which you don’t think your child will receive any financial aid, keep in mind that not all financial aid is need-based. If you have a high-achiever on your hands, there could be some significant money on the table in the form of scholarships and other merit-based awards for things like athletics, music, and community service.
So take a deep breath and grab the calculator! By following these tips in figuring out how much to save for college, you’ll be on your way to creating a brighter future for your child in no time.