Congratulations! You’re starting a family. In addition to managing midnight feedings and figuring out how to get baby slobber off your work clothes, you’ve got some serious financial considerations to work through. That little bundle of joy in the bassinet is going to be headed off to college before you know it, so it’s never too soon to start thinking about how to pay for it.
So when should you start saving for your kid’s college? The short answer is, as soon as possible. The long answer? Well…
What to do before you start saving
Yes, it’s important to start saving for college early, but many experts say you need to place equal if not greater importance on your own retirement plans. After all, there are other options for paying for college, but your only option without any retirement savings is to a) keep working or b) get by on meager social security payments. College can be paid for with loan programs, scholarships and grants. Retirement cannot.
Then there’s this to consider: Do you want to put your kids through college, only to become a burden on them later in life because your retirement savings run out? By making sure you’re going to be okay in retirement, you can save your own kids from financial strain down the line. Here’s a checklist to make sure you’re in good shape before you start saving:
- Contribute at least 10% of your paycheck to retirement
- Pay off high-interest loans (credit card debt, for example)
- Get rid of your own student loan debt
- Establish a rainy day fund with 3-6 months’ worth of expenses in case you lose your job
- Create an “accident fund” to deal with unexpected, high-priority expenses like car repairs or medical bills
It’s like they say on airlines: Put your own oxygen mask on before helping others.
Ok, I’m squared away. So when can I start saving?
If you’re already putting enough away for retirement, start saving for your child’s college fund as soon as you can. According to the College Board, tuition and fees at four-year public institutions have increased by 51% in the last decade (adjusted for inflation). In fact, for the 2009-2010 school year, the average tuition and fees for a four-year public institution was more than $15,000 and more than $35,000 for a private institution.
Technically, you can start saving up for your kid’s college before they’re even born. Because you can change a 529 college savings account’s beneficiary to another member of your family without penalty, some people take out 529’s with themselves as a beneficiary and then transfer it to their child’s name. And since earnings on a 529 account aren’t taxed, the earlier you contribute, the more you’ll have when baby’s ready for college. So as soon as you know you want kids, you can begin to save up.
And start early – small contributions add up over time. For example, if a family starts setting aside $50 a month when their child is born, by the time the kid is 18, he or she would have $21,000 (based on a 7% return). The more you save early on, the larger the return will be.
That said, you don’t have to eat Ramen like your future college student in order to add a little extra to the 529 account. Remember to balance an affordable college with other priorities you might have, like buying a house or helping your own parents as they age. Saving for college is a noble goal, but it’s not necessarily the only one.
Choosing a savings plan
There are lots of plans to choose from. Most states have 529 savings plans that provide tax benefits, which is especially helpful if your state has an income tax. If you don’t need to access your child’s college fund until after you are 59-1/2, you can consider an IRA. IRAs might be more beneficial if you’re looking for higher interest rates than the average savings account or 529.
If you’d rather use a standard savings account, you can set up an account in his or her name, but here’s the thing: If you still need to apply for financial aid, having too much money in your child’s name could hurt his or her eligibility.
The investment pays off
Despite the ever-increasing expense, going to college pays off. According to the U.S. Census Bureau, education has more impact on earnings over a 40-year career than any other demographic factor. A Census Bureau study explored the relationship between earnings and education using data collected monthly from communities for the years 2006 to 2008. Study authors Tiffany Julian and Robert Kominski estimated that someone with a professional degree would earn $72,000 more a year than-someone with an eighth-grade education. That’s more than five times the $13,000 income gap between genders.
You can do it – with a plan
Planning for your child’s retirement is not an easy feat, and the information above is surely a lot to absorb. Although you have a lot of decisions to make, if you plan far enough ahead, you can help fund your child’s higher education without impacting your own retirement or other plans. Be sure to make sure you’re future is secured, survey the best saving options for your family, and once you settle on a plan you’ll be on the right to helping your child reach his or her higher education goals.
Graduating kid image via Shutterstock.