If you’ve got young kids, you probably have a lot on your mind. You might be saving for a different home, a safer car and your retirement fund. But on top of all that, you might also be concerned about saving for college. How much should you actually save in a college savings account?
There are some rules of thumb to keep in mind when you’re putting away money for your child’s education. These tips should help you come up with a number you feel comfortable with:
1. Don’t sacrifice retirement savings for a college savings account
Whether it’s for your children, a relative or even yourself, it feels good to put money aside to help fund someone’s education. And if you can manage it, it’s definitely a smart move. But you need to take care of yourself first.
If you can’t afford to fund both retirement and college savings, put money into a retirement account first. Students can get a loan for school, but it doesn’t work that way for retirement. Make sure you prioritize your own future first.
2. Choose the right savings method
The way you save for college is going to play a big role in how much you can save.
A common choice for college savings is the 529 plan. This is a state-sponsored education savings option, and college expense withdrawals are not taxed. 529 plans vary from state to state, so it’s important to pay close attention to which state plan is best for you. You do not have to select your own state’s plans, though there may be some tax-related benefits to going with your own state’s plan. Check with your state first to see which you should choose. My picks for 529 plans are Utah’s and New York’s, because these have low fees and great fund lineups paired with an easy setup.
529 plans also offer two different options: prepaid and savings plans. The difference between these two is that a prepaid plan covers the cost of tuition for a specific, participating school (this can be transferred to other schools, as well) while the savings plan invests savings along the way. Keep in mind that prepaid plans usually pay for in-state public universities, though they may cover partial costs at private or out-of-state schools.
What if your student decides not to attend college? You can still withdraw the money, but you’ll incur a 10% penalty. You can also transfer the money to another family member without incurring any taxes.
There are other choices for a college savings account, like a Coverdell Education Savings Account, which is very similar to a 529 plan that can be used for K-12 expenses as well.
Whatever you decide, try to find a savings vehicle that will work for you, and avoid letting the money sit in a savings account that won’t grow much over the years.
3. Don’t get caught up in paying for 100% of college expenses
As a parent, you might set out to completely cover your child’s college expenses. But anything you can cover for your child is a gift, even if it’s just one semester of school. That’s one less semester they have to pay for themselves. Focus more on doing what you can and not getting caught up in the big, scary number that a college savings calculator tells you that you need to set aside.
The number you aim for will be dictated largely by your situation, but here’s something to consider: According to Vanguard, four years of public, in-state college could cost more than $200,000 in 18 years. That’s a pretty intimidating number. Mark Kantrowitz, author of Filing the FAFSA, recommends trying to instead save for just a third of projected college costs. Another third can come from loans, and the last third can come from scholarships or grants. It’s a more manageable goal to shoot for, especially if you’re trying to put more than one kid through college.
But whatever you can put away beyond saving for your own retirement will pay off, especially if you get an early start.
Do you need help preparing for retirement? Contact me today to set up a meeting to talk about your goals. You can also download my free ebook for physicians for tips and information about getting your finances on track.