If you have children, planning for college is a topic that you should begin to discuss with your financial advisor during your first meeting. With the cost of a college education increasing every year, the number that needs to be saved is staggering. But just like retirement, planning for college is essential.
As we all know, children are costly. Even before college begins, the cost of raising a child from birth to age 18 is approximately $245,000 according to the US Department of Agriculture. This estimate can vary widely depending on where you live and how much you earn. The estimates for high income earners in the Northeast can be as high as $455,000.
These figures are based upon the cost of housing, food, clothing, health care, education, child care and miscellaneous expenses including cell phones and computers. And it does not include the ever rising cost of a college education.
The cost of college tuition has increased faster than any other household expense in recent decades. Since 1983, the cumulative percent price change for tuition has risen by 688%. According to JP Morgan Asset Management, the estimated cost for a newborn to achieve a four year college education will be $424,425 for a private college or $190,767 for a public college. Either way, this expenditure will be one of the family’s largest expenses.
This is where the planning comes in. It is important to establish a goal and determine how much you can save for your child’s tuition. It is much more than simply saving. It is establishing an investment plan and strategy that can increase growth potential and accumulate more for college. The sooner you start saving, the more time you have to grow your college fund through the power of long-term compounding. Even the smallest contributions can make a difference over time.
Choosing the right way of investing is also significant to reaching your goals. The 529 College savings plan offers tax-free investing and withdrawals for qualified higher education expenses according to current tax law. This is integral as the capital gains on the investments will not be taxed increasing the funds available for tuition costs. In addition, some state’s offer tax deductions or credits for contributing to any 529 plan. Each state offers different options so explore which is best suited for your needs. And don’t forget to examine all the fees and expenses associate with a plan such as program fees, asset based fees, enrollment or maintenance fees, and sales commissions.
It is important to choose the correct investment portfolio as well. Diversification in the 529 plan, like most investment portfolios, is significant to achieve the desired results without subjecting the investments to undue risk. A balanced portfolio has delivered higher returns historically than bonds or cash. Choosing a fund that will help your investments grow and outperform the tuition inflation will be important to having the most funds available for your child. You can not start to soon to begin the process of saving for this educational goal.
One note of caution: Do not forsake saving for your retirement at the expense of saving for your children’s college expenses. They will be able to secure student loans much easier than you will be able to get “retirement” loans!
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