You are just getting over the sticker-shock of daycare expenses when you realize saving for your little one’s college is inevitable. Meanwhile, there are new costs associated with raising a newborn that has seemingly skyrocketed in recent years. How are you supposed to prioritize your saving plan? How much should be socked away?
Of course, you need to prioritize things like daycare and new insurance expenses that arise with a young one, but there are saving & investing plans specifically geared for college planning that should be considered. Automatic saving is key, and often taking the first step is the hardest (but also most important) part.
Like many answers in personal finance, you should start saving as soon as possible to allow compounding returns to work in your favor. The investment research company Morningstar found that on average, parents don’t start saving until their child is 7 years old[1], leaving 11-15 years for saving & investment growth. Believe it or not, starting earlier than the average and capturing those extra 7 years can make a big difference in the final balance.
In Michigan, $14,414[2] is the average annual cost of college tuition per year. This is in-line with the national average of $14,407. Multiply that by four to get an expected 4-year bill of nearly $60,000, and that does not consider the ancillary costs like housing, food, and books.
Like saving for retirement, if you can get in the habit of saving early, it will make the world of difference to tackling this future liability. Try just $50 per month in automatic saving into what is called a 529 account. A 529 account is a state-sponsored saving vehicle specifically for a child’s future college expenses. The benefit is that once funded, the account grows tax-free and withdrawals are tax-free so long as it is for educational expenses. An added benefit, you may get a state income tax deduction depending on where you live.
Do you have direct deposit from your paycheck to your checking account? Probably so. Saving for your child’s education is just as easy! What is so great about automatic saving is that once you get started, you can almost ‘set it and forget it’. As time moves on, we will work with you on revisiting your contribution amount. A great goal would be to increase your contribution to the college savings plan each year. Before you know it, the account will likely have grown to a not-so-tidy sum by the time you and your child are off visiting college campuses. And that time will be here before you know it!
Here the point:
You have heard the refrain – start saving early & often. That certainly goes for your child’s education. We will guide you through the process of setting up an automatic saving plan to the proper account with the right asset allocation.
Action Items:
- Ensure you are already saving for your own retirement
- Set up a direct deposit from your checking or savings account to a college saving plan
- Create automatic investments within the plan
- We can help pick the right plan with the right mix of investments
[1] https://www.morningstar.com/articles/950278/when-to-start-saving-for-college
[2] https://www.collegecalc.org/colleges/michigan/
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