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College Savings

5 Reasons It Pays to Start Saving for College Early

Family saving money in piggy bankExpectant parents have a million things on their mind, including baby names, nursery décor, and childcare arrangements, but how many are thinking about college? Who really wants to think about sending their bundle of joy off to the dorms one day? Yet the reality is that 18 years is a relatively short time horizon when it comes to saving. Think about your retirement. Many of us started saving in a 401k when we were around 25 years old and plan on working until we’re 70 – giving us 45 whole years to save. And just like retirement planning, the earlier you start to think about paying for college, the better. So whether you’re a brand new parent or a seasoned veteran who’s been procrastinating, here are five compelling reasons to get started:

  1. Your kids will get more expensive
    If you’re a new parent spending hundreds of dollars a month on diapers, formula, or other newborn expenses, you might find this hard to believe. But the truth is, the older your child gets, the more money you’ll need to spend on him or her, especially if you plan on having more than one. Sure, you won’t be paying for diapers forever, but have you considered how much sports and other children’s activities cost? How about preschool? Not to mention that when little tummies grow, so do appetites – and your grocery bill. College will likely be the most expensive cost associated with your children. Wouldn't it be nice to have some money saved for those college bills when they come due?

  2. Loved ones will want to help
    Shortly after the big announcement, soon-to-be parents will start to receive baby gifts from excited friends and family members. This will likely continue with baby showers, visits to the hospital when the baby is born, and birthday parties every year. Many savings plans now feature gifting programs that allow you to send notifications via email or social media. When excited family members and friends ask you for gift ideas, you can easily direct them to your college savings plan. Those who want to contribute can make secure, electronic deposits so you don’t have to worry about collecting cash or checks. Your friends will appreciate the opportunity to give a meaningful gift that can have a lasting impact on your child’s future.

  3. Your money will have more time to grow
    One of the most effective ways to save for future higher education costs is with a 529 college savings plan. A 529 plan is an investment account where you can really make your money work for you. Any interest you receive on your contributions will be compounded, which means you’ll earn interest on top of interest. What’s more, earnings in a 529 plan grow tax free and are not taxed when you withdraw them, as long as the money is spent toward college expenses. The state you live in may also offer additional tax breaks for residents.So how much of a difference can waiting a few years actually make? If you plan on sending your newborn daughter to a four-year public university in 18 years, you’ll be looking at total costs around $215,000 based on a college inflation rate of 4%. To cover half of that cost, you’ll need to start saving $232 per month immediately, assuming a 6% annual investment return. But if you wait just four years to start saving, you’ll need to put away almost $100 more per month to reach your goal.

  4. You need time to plan
    By starting to save for college when your children are young, you’re giving yourself enough time to create a realistic goal. Tools like Savingforcollege.com’s College Savings Planner are available to help you develop a customized plan based on the age of your child, your household income, and desired type of college. The Planner takes your information and calculates the amount you’ll need to save on a regular basis to be able to afford your school of choice. Once you know the amount you need to save, you view a list of selected 529 plans based on criteria you select such as 5-Cap Rating, performance, cost, or ability to enroll directly.

  5. You might be forced to cut back
    Families with children often find themselves adjusting their budget due to changing life circumstances. One parent may lose a job, or even voluntarily leave his or her career to become a full-time caregiver. When this happens, parents often find themselves reducing their monthly 529 contributions or stopping them all together. After all, saving for retirement needs to come first, since you can’t take out loans or get financial aid to fund your golden years.While this might hurt your chances of meeting your original goal, it might not be so bad if you already have money saved in a 529 plan. Any money you have sitting in the account will continue to grow tax free until it’s time for college. But if you haven’t started it will be extremely difficult to catch up later.


Kathryn Flynn is Financial Writer and former Content Director of Savingforcollege.com. She has worked in the investment industry for over 10 years and brings a wealth of knowledge to her posts. With three young children of her own, she is a firm believer in the need for financial awareness and enjoys helping other families understand the benefits of saving for college with 529 plans. You can follow Kathryn on Twitter at @saving4college and on Facebook.

 





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