And why you should start early — like, really early.
So, you’ve resolved to start saving for your child’s college education. Great! You’re taking control of your family’s financial future. You’re giving your child choices — not only college choices but career and lifestyle choices since you will help them to graduate debt free.
But how much do you actually need to save? At CollegeBacker, we answer this question every day. Here’s how to figure out how much you should save, how to invest your savings tax-free, how to commit to a monthly contribution, and what to do if your numbers don’t add up.
Set Your Future Goal
I don’t believe in sugarcoating, so let’s get straight to it: The bad news is that college costs are expected to double again over the next 10 years. The good news? You don’t have to save for the full cost. Shoot for one-third.
Why? The remaining two-thirds can be filled in by scholarships, financial aid, and current income (e.g., your income or your student’s work-study). This is a rule of thumb used by financial advisors across the country, and it can also save your sanity by making your savings goal a little more realistic.
Say you’re planning for a child who’s four years old today. Your savings goal should be $60,400 for a public, in-state college; $95,600 for a public, out-of-state college; and $118,900 for a private college.
(If your child is already older and you haven’t started saving yet, don’t panic! For a personalized recommendation, go here.)
If these numbers seem daunting, don’t worry. There are ways to break it down into an achievable monthly contribution. But first, we’ll share a little secret that could cut your monthly contribution in half.
Invest Your Savings, Tax-Free
Nearly 7 in 10 parents aren’t familiar with a 529 college savings plan — and they should be.
Putting it simply, a 529 college savings plan can help your savings go further. It’s a tax-advantaged investment account that works like a Roth IRA, offering tax-free growth and tax-free withdrawals. And yes, parents can open a 529 plan for their child’s college savings. It’s not just for grandparents!
Most 529 plans also offer a passively invested, age-adjusting portfolio option that starts with higher growth investments (e.g., stocks) and becomes more conservative as your child approaches college. This means your money grows over time, but you’re also reducing risk as it becomes time to pay for college.
What difference do these tax savings and investment gains make? If you have a 4-year-old child targeting a private university, your monthly savings goal might be $700/month using a savings account versus $400/month with a 529 college savings plan. That’s a big difference!
There are a lot of 529 plan options, but investing doesn’t have to be complicated. Here are a few guidelines in case you’re doing the research yourself:
- Compare the fees and investment portfolio options. Look for a low-fee plan (usually offered directly by a state) with age-adjusting portfolio options.
- Check if your state offers an income tax deduction for using its plan. If so, take advantage. But, remember, you can have multiple 529s, especially if you want to use a better plan for contributions beyond your state’s deductible amount.
- Make sure it’s easy for you (and your family) to use. If you want to get the grandparents involved, make it easy for them!
Commit to a Monthly Contribution
But how much should you be saving right now? Let’s assume you are shooting for one-third of the projected cost of college, and you’re using a 529 college savings plan to invest your savings and gain its tax advantages over time. If you’re saving for a 4-year-old child, here are your estimated monthly contributions. (Find your own estimated monthly calculations here.)
- Public (in-state): estimated $210/month
- Public (out-of-state): estimated $330/month
- Private: estimated $415/month
Remember, these numbers only work if you start investing early with a 529 college savings plan. This way, you will benefit from investment gains, plus tax savings on those gains. Is this achievable for you? If so, great! If not, keep reading.
Adjust for Your Personal Situation
The best monthly savings goal is the one you’ll stick to, so choose one that fits your budget. For many families, this is about 10 percent of discretionary income.
Beyond that, ask yourself: Who are the important people in my child’s life? Most likely, many of them would love to help, and there are many occasions when they can: birthday parties, holidays, early school graduations, and other personal milestones.
Ask relatives to swap out a gift for a birthday or holiday and give a small contribution to college instead. Your child won’t know the difference — and let’s be honest, they probably have too many toys as it is.