College is expensive and there doesn’t seem to be a cap on the cost out on the horizon anywhere. Even if you save $50 each month from the day your child is born until they are 18 years old, you will only have $10,800. Even if you add in interest over those 18 years, you’re still a long way from getting your kid out of school without any student loans. What’s a parent to do?
Automate your savings
Instead of having to make the decision every month to put a portion aside toward the college fund, set up your accounts to automatically put a designated amount in a separate account. It adds up over time and you’re not tempted to skip any months by spending the money. The amount you set aside depends on your budget, but keep the facts from the first paragraph in mind. Fifty bucks each month won’t cut it.
What’s more important to you: driving the newest car or your child’s education? In the big picture, most people would say their child’s education, but when it comes down to the practical, everyday spending, actions indicate otherwise. How much could you save each month and put toward college if you:
- got basic cable instead of the premium package?
- shopped with coupons? (Think of each coupon as a deposit into the college fund.)
- drove a fuel efficient vehicle or carpooled to work?
- bought store brands instead of name brands?
529 College Plans
Now that you’ve prioritized your spending so you can automate as much savings as possible each month, you need a place where that savings will grow over time. 529 College Plans are similar to Roth IRAs in that you invest after-tax money that you can withdraw tax-free years later. They’re different than Roth IRAs in the purpose of the fund and the limits. Also, there are additional fees when you withdraw from the 529 if those funds aren’t used for college expenses. If you aren’t sure whether or not your child will go to college, a Roth IRA gives you more flexibility with how to spend your investment.
If you choose the Roth IRA over the 529, it’s important that you keep the account in your name so it doesn’t count against you child when they fill out the FAFSA for financial aid. The same holds true for any savings or checking account containing more than $3,000.
The Kids’ Responsibilities
Saving for college is a great way to teach kids about budgeting, investing, and the cost of living life as an adult. Incorporate them into your college savings plan by encouraging them to get an after school job. Have them save half of their income for college and use the other half for current expenses. This goes a long way toward combating entitlement.
However, if you have a kid who is exceptionally gifted academically, you might decide to have them forego the job in favor of more time to study. The amount they could receive in scholarships could exceed what they might have made working. Free money is nothing to sneeze at.