When to Start Saving for College
You knew that adding a member to your family wasn't going to "come cheap." With the cost of diapers, formula, breast pumps and clothing, taking care of Junior's basic needs can put a strain on almost any family's budget. You want to start squirreling away at least a little something for future college costs, but how does the average family juggle saving for higher education with a mortgage, life insurance premiums, retirement planning and car payments?
"Every family should try to save for their children's education. Unfortunately, not every family has that opportunity," says Brian Cronkright, a college financial planner and member of the National Association of Financial Aid Administrators. "Making a decision on what to save for – retirement or your child's education – is a personal choice that must be made by each individual family."
"The balancing act is a tough one, and many couples struggle to find a way to make it work," says Jennifer Ridley Hanson, director of financial planning for Financial Finesse, an agency that educates women on how to better invest and save money. "Sending your children to college is an important goal for most couples, but so is retirement." She suggests that families, especially those with limited resources, try balancing their savings between all of their financial goals. "Kids can work their way through college, but Mom and Dad can't work their way through retirement when they are 80 and 90 years old," she says.
Kirk Fine, a financial advisor with Waddell & Reed Financial Services, says it's important that families recognize their financial priorities and set savings goals accordingly. "I usually recommend that risk management issues – life, health, disability insurance – take top priority. Without an income, nothing would be possible. You can always get a loan for college if worse came to worst, but you will not be able to take a loan for retirement." He suggests that if retirement planning is on target by the time your little one is ready to matriculate, some of the funds being used for retirement can then be diverted to college savings.
Never Too Late to Start
Whether you child is 16 hours old or 16 years old, most financial experts agree that it's never too late to start saving for college.
"Any amount of money – no matter how small – saved today will have a greater value tomorrow," says Michael Darne, director of business development at Wiredscholar.com, a site produced by Sallie Mae for college-bound students, their parents and guidance counselors. "Investing just a few dollars a week from the time a child is born can grow significantly over 18 years. If you can't put away as much as you think you will need, don't give up. Something is better than nothing."
Investing can certainly help those few dollars turn into much more, but Darne says that one of the most important factors in determining which investment vehicle will best suit your needs depends on how aggressive you want to be, which can be determined by your child's age when you start investing. In other words, the younger the child when you begin, the more aggressive you can be. That's because, in theory, you have more time to recover from a loss if, for example, a risky high-yield bond investment doesn't pan out like you thought it would.
"It's ... important to think about the time-frame on the investment," Darne says. "If a family needs the money they'll invest relatively soon to pay for their child's education, the stock market may not be their best bet because they run the risk of the stock market dropping drastically. However, if the family started saving when the child was a baby, the stock market may provide the greatest return over time." He adds that families should consider their own personal financial situation, comfort level with investing and the length of time they have to invest before choosing how to invest their money and how much of it to invest.
"[But] if the child is to begin college next year and you only have enough disposable income to fund the college bills as they come due, then it may be late to invest," adds Fine. "In this case, saving during college may work in your favor. You can use the savings after the child is out of college to repay the 'low interest' [student] loans."
How Much Is Enough?
With tuition today ranging from $10,000 to $25,000 a year and sometimes higher, college is one mighty expensive institution. As a result, if you plan to fund the whole thing without student loans, it may be hard to imagine saving $40,000 to $100,000 by the time your child graduates from high school, especially if there are no millionaires dangling from your family tree and no oil wells in your backyard. The key is to start sooner rather than later.
"If you start saving right when the child is born for an educational institution that costs $10,000 a year and earn 5 percent interest, the cost of savings would be $115 a month until age 18," says Allen Holmes, a CPA from California. "If you start at age 5, it would be $183 a month. At age 10, $340 and at age 15, $1,032 a month."
Starting early with compounding interest would be best, Holmes says, "But a lot of families wait, thinking they can make it up when their jobs pay more later in life. Can you really afford to take that chance? What would you do if something happened to one or both parents?" he asks.