When Should I Start Saving for My Kid’s College?
College has now become the largest purchase that a family will make outside of buying a home. The pace of college price increases has been outpacing the increases we’ve seen in wages by a large margin which has made the idea of saving for a child’s college education even more daunting. As advisors who specialize in college funding we’re often asked by the parent’s on when should they start funding for college or if what they have put away already sets them up well for their kid’s future. The truth of it is you should start early and save often, but no one wants to hear that answer because it’s the obvious one that adds no value to most people. The reality of it is that depending on what stage of life your children are in, the answer can vary widely.
Early Planning Stage (0 – 5 Years):
At this stage usually, parents are more focused on paying for daycare over starting to save for college. For those of us lucky to have the extra income, then yes, if you can start now you technically don’t have to save as much over the long haul due to your money having more time to work for you. A $258 per month investment for a newborn can yield $100K by the time a kid is 18. If you waited until that child is 10 years old then you’d be required to put away $814 per month to yield a similar end result.
If you start saving at this stage usually the most prudent way to do so is through what is called a 529 plan which acts like Roth IRA where it’s funded with after-tax funds and comes out tax-free. 529 funds only come out tax-free though if used for education-related expenses. It’s a great way for everyone from grandparents, parents, and friends to put money away for a child’s education. Learn more about how to select a 529 plan from our previous post.
All that being said though for those who can’t afford a large monthly contribution, just opening an account and tossing in extra money when there is some can be helpful in the end. For parents who expect their kids to stay in-state, or pay some of their way towards college, it might make sense to put more money towards their own goals and keep money liquid for other large expenses.
Grade School Stage (6 – 13 Years):
For all of the parents who live around us in Nocatee, FL this is usually a great time to start saving for college because you generally can redirect some of the funds that were going to day-care, that is freed up through public school, to saving for college. You’re also likely making more in income as you grow along in your career, so even if you are utilizing private education you still may be able to begin prudently saving.
It’s smart to start getting a gauge for what kind of student your kids might be. We never know what school our kids are going to attend until they ultimately pick one later on, but as parents we can tell whether our child is very social and likely to attend a large state university, or extremely intelligent and destined to attend an Ivy University, or is extremely artistic and bound to go to an art school like SCAD (The Savannah College of Art and Design). As parents get a better understanding of the type of schools that their kids are likely to attend, we can use that as a signal for them to start funding more or less towards their kid’s 529 plans. It’s important to have a target for how much you want in a 529 plan by the time your child goes to college because we don’t want to overfund those accounts due to penalties on withdrawals that don’t get used for education. Our target amount of suggestion for parents is to have 50%-75% of the funds you want to provide for your child in a 529. If you want to provide for all of your child’s college cost and you’re thinking it’ll be an Ivy League University that number is drastically different than if you only plan on funding 50% of your child’s college cost and they are more likely to go to a state University.
Late Stage Planning (14 – 18 Years):
At this point is when the cost of an upcoming college education becomes real and fast approaching. We find that it’s not until now that most parents start to put real thought into how are we going to foot the tuition bill once our child goes off to school. Even for the parents who have planned well for college expenses, there are savings to be had in this stage whether it’s through financial aid, scholarships, tax strategies, or other avenues. Now is a good time for un-prepared and well-prepared parents alike to really start putting together an actual college payment plan. It absolutely helps when there are some healthy savings to work with but I view putting together all the late-stage planning pieces as the big game and the earlier stages as the practice beforehand. It makes the game easier to handle, but you still have to go out and get a victory (or make sure that you walk away with spending the lowest dollar amount possible in this case).
In late-stage planning it’s important to continue putting money away towards funding college, but the ultimate money saver is lowering the actual net cost of college for your child. If you get around to focusing on this stage as early as your freshman or sophomore year, it allows for an open playbook when we are looking for ways to cut down the net cost of college. Once you pass the fall of your junior year certain options begin to not be available to us, so it’s important to not let it get past that point if at all possible. For parents who don’t plan on putting money towards their children’s college efforts, this is still an important time to sit your kids down and help them figure out their game plan.
Better Late Than Never
As mentioned earlier typically the answer to “when should I start saving for my kid’s college?” is answered by “the sooner the better”, but I think the more helpful answer is “it’s better late than never”. There are even certain tax strategies that can prove helpful when the student is already enrolled in college. Everyone’s situation is unique but understanding your situation and having the desire to position yourself as best as possible can be done at any point with your children and their education.
Ian is a managing partner of Mellen Money Management, a fee-only, independent financial planning firm locally based in Jacksonville, Florida. In a nutshell, Ian helps clients plan for the financial impact of major life events, so that they are prepared for life's biggest moments. Such an approach has helped his clients live a more fulfilling life. Mellen Money Management’s financial services include investment management and comprehensive financial planning. While their specialty is all things college -- they help families pay less for college and young professionals tackle their student loans. It is their mission to end the student debt crisis one client at a time. To do so they believe the cost of college cannot be solved in a vacuum and that financial trade-offs, like saving for retirement, must be prioritized in a way that one goal doesn't come at the expense of the other.