It's easy to say your family should save for college, but where do you start? Frustratingly, this is one of the things they don't teach in college! Keep reading for absolute basic steps on how to get started saving for college costs.
Why Save for College in the First Place?
It’s hard to imagine sending your little girl or little boy off to college. It’s how we’re built as parents. If a four year degree is a future goal for your child, you need to think about how your family will pay for that goal. Why? College is expensive. Decisions around college for a child are likely to be some of the biggest financial decisions your family will ever make. The problem is compounded by the rapid rise in the cost of college over time.
By putting even a modest amount of college money aside and growing it over time, your family can be in a much better position when it comes time to make college decisions. Saving for college ahead of time is one of the most effective ways to reduce the stress of college costs when the time comes.
Make Saving for College A Part of Your Monthly Budget
Talk with your spouse about what makes sense for your family’s monthly budget and spending. Choose an amount that you can sustain over time. Many options will allow you to put away as little as $10 a month. If you’re unsure, just start with that. Don’t get stuck on what you should be saving. You can figure that out later.
Choose a Place for Your College Money to Grow
Next, you’ll need to choose a place for your savings to grow. There’s different options that each have their pros and cons. For most families with a goal to save for college, a 529 college savings plan will be the best option. In some cases, another option could be best, but the majority of American families find a 529 plan aligns with their goals and needs. 529 plans are aligned with different states. You don’t have to choose the 529 sponsored by your state of residence, but most families will be best off with that choice.
"On the first day of every week, each of you is to put something aside and store it up, as he may prosper, so that there will be no collecting when I come." 1 Corinthians 16:2 ESV
Set up an Account
With a destination in mind, it’s time to set up an account where college dollars will go and grow. Almost every state allows an online option to establish a 529 plan. Set aside 30-60 minutes when you have some quiet to complete the steps.
Here’s a few things you’ll need at your fingertips.
This is the child you want to save for. You’ll need information like social security number and date of birth for them. Be sure to use the child's legal name as it appears on their birth certificate. No nicknames.
This is the adult who will control decisions on the account. This is usually a parent but is not required to be. You’ll need full name, address, social security number, and date of birth for the adult you choose.
For most families, contributing to begin with and on an ongoing basis is easiest with an electronic bank transfer. Plans do offer additional options to contribute, but this by far the one most folks choose.
“A mind is a fire to be kindled, not a vessel to be filled.” – Plutarch
An important part of saving for college is growing that money over time. In a 529 plan you will be able to invest money that has potential to compound and grow over time. The investments available are specific to each 529 plan. In other words, some plans have more or less options than others. The terminology will also differ in some cases. The options tend to fall into these broad categories.
Age-based options allow a very hands-off approach. This option chooses an investment allocation based on how long until your child turns 18. This is done with the idea that college money should be invested differently for a child who is many years away from using college money compared to a teenager moving into the dorm soon. The age-based option will adjust automatically over time to reflect how close your student is to college.
Target-Allocation or Multi-Fund Options
Target-Allocation Options allow you to make a choice on the type of portfolio you will have. These options typically contain a number of investments with each option varying on qualities like how much risk the investments have or the mix of investments like stocks and bonds. This is option is sometimes referred to as a "fund of funds."
Single-fund options provide the most control but also put the most responsibility on you. 529s that offer single-fund options provide you with the opportunity to choose one or more mutual fund-like investments. If you decide to undertake this option, make sure your research the options or speak with a fiduciary financial advisor before you proceed.
Automate Saving for College
One of best ways to save for college over time is by not having to think about it. Set up a regular contribution from your bank to the 529 account. Monthly works best for most families, but most plans allow other options like weekly, bi-weekly, or quarterly. If you remove the possibility you might forget, then you don’t have to worry about it.
Bonus Tips on Savings for College as a Beginner
It’s more important to get started than to worry about how much you’re saving
A common pitfall and question where many families get stuck before they start is trying to determine how much money you’ll need for college. While this is important, how much you need to save is irrelevant if you never get started saving. Get started and make regular saving a habit. You can always change this over time as you get a better idea of your progress on your family's college savings journey.
The Earlier the Better
There might be some tax benefits for your family
Depending on your state, your family might get a tax benefit from the money you put in a 529 plan. An example of this sort of benefit is some states with an income tax allow you to deduct money for your state income taxes. It's bit like paying money to yourself and reducing your tax bill at the same time. There's conditions so be sure to check with a qualified tax professional on the specifics.
Family and Friends Can Help
Contributing money to a 529 is not just for Mom and Dad. Anyone can put money into a 529 you establish. That includes grandparents, Aunts, Uncles, friends, and anyone else who has a vested interest in the future education of your son or daughter.
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