photo courtesy Paul W Locke
photo courtesy Paul W Locke
When Should I Start Saving For My Child’s College?
If you’re asking this question, then it’s probably safe to assume that you haven’t started saving already. In reality, the sooner you start saving, the better. Starting a college savings account when you are even thinking about having children is a great idea. Due to the power of compounding interest, the longer you save, the more time the interest earned on the money has to work, and the bigger your savings will be when your child is ready to head off to college.
The next best time to start saving for college is right now! If you haven’t started yet, don’t worry about it just get started. You’ve still got plenty of time to put a big dent in that college bill.
How Much Should I Save for College?
This really is a tough question to answer. College tuition costs are rising faster than the inflation rate. The difference between the costs of a local junior college and a private University can be mind-boggling. What will your child want to be when they go to college? How many years of college will they need? Will they get any scholarships?
The best you can do is make some assumptions and move forward. There are calculators on the Internet (such as savingforcollege.com) to help you determine how much to save. You can also talk to a financial planner to get some help with your planning. Figure out how much you need, and then see how much you can fit into your budget and go from there. Again, the most important thing is to just get started with what you have now, and then work from there.
Where Should I Put My College Savings?
There are several good ways to save for college that the government encourages through tax savings. These include Coverdell ESA’s, prepaid college plans, and my favorite, the 529 plan. The 529 plan is currently favored by most investment advisors due to its flexibility, low cost, and tax advantage status.
With a state sponsored 529 plan, you can save for college without being taxed on the earnings. As long as the money is used for college tuition, you will not pay taxes or penalties on it when you withdraw the money. If the money is not used for college, you do not lose the money. You may have to pay taxes and/or penalties on it depending on when and what you use it for, but the money does remain yours.
As far as how to invest the money, you should use strategies similar to what you would do for retirement savings. You can read my previous article on this subject here. You should also find a good Financial Advisor to help you make your selections.
An advantage that you currently have in Indiana for investing in the Indiana sponsored 529 plan is that you will get a credit on your state taxes each year when you invest. Currently that amounts to a 20% credit for up to $5,000 invested per year. That means if you were to save the full $5,000, you would receive $1,000 back on your taxes. That’s a pretty good deal! Keep in mind that this can change with the tax regulations, so consult your tax and investment professional for the latest changes.
The Bottom Line
There’s an awful lot to consider when planning for college. The most important thing for you to remember though is to save as much as your budget allows, as soon as you possibly can. Don’t delay in starting because the day will be here sooner than you imagine.
If you’d like some help figuring out how to fit this into your budget, please contact me using one of the methods below. We can schedule a free 30 minute consultation to talk about your needs and how I might be able to help you.