Many families have trouble getting motivated to save for college. They may be overwhelmed by projections of future college costs and feel that the amount they can save won’t make much of a difference. They may have heard that families who save are penalized by financial aid formulas. They may say “why bother” and give up in dismay before they even get started.
There are, however, several strategies that can make it easier to save for college. The most important step a family should take when saving for college is to get started, even if the family can save only a small amount per month. Once a family has started saving for college, it becomes easier to increase the amount saved each month.
Most families start saving for college at specific trigger times, such as when the baby is born, when the child enters kindergarten (age 5), when the child enters first grade (age 6), or when the child enters middle or high school (age 12 or 13).
Ideally, the family should start saving as soon as possible, since their greatest asset is time. If the parents start saving at birth, about a third of the college savings goal will come from the earnings due to compounding. If the parents wait until the child enters high school, less than 10 percent of the savings goal will come from accumulated interest earnings. Nevertheless, it is never too late to start saving for college, since every dollar saved is a dollar less borrowed. It is cheaper to save than to borrow.
Dollar-Cost Averaging: Dollar-cost averaging is an effective investment strategy that invests a fixed dollar amount at regular intervals. When the cost of an investment is high, fewer shares are purchased. When the cost of an investment is low, more shares are purchased. This follows a strategy of “buy low, sell high.”
Make the saving automatic by setting up an automatic monthly transfer from a bank account to a college savings plan. Many 529 college savings plans provide such automatic transfers, some as low as $15 or $25 a month. With an automatic transfer, the parents no longer have to think to save. In addition, automatic monthly investments in a 529 plan provide the benefit of dollar-cost averaging, one of the most effective blind investment strategies.
When money is automatically transferred from a bank account to the college savings plan account, the parents quickly get used to having less money available to spend. This makes it easier to increase the amount saved each month. For example, the parents should increase the amount saved per month whenever they get a raise at work.
It can also help to set a reasonable college savings goal and to measure progress toward the goal. Instead of looking at the total college savings goal, which can be intimidating, break it down into pieces, such as the much smaller amount that must be saved each month. Take it one step at a time.
Parents should not worry about falling short of their college savings goal. Most parents are in a similar situation. Parents should seek to accumulate about a third of future college costs, but the average amount saved is only about 10 percent of projected college costs.
Getting the family involved can provide social pressure to increase savings. Ask relatives for help saving for college. Perhaps, they will be willing to contribute some money for every "A" the child earns on his or her report card. Older relatives may be more comfortable with giving a U.S. Savings Bond, which can be rolled into a 529 college savings plan. Encourage children to save part of their allowance with a matching contribution to the child’s college savings plan.
There are many other ways to get money to save, besides diverting money from the parent’s paycheck:
Copyright © 2019 by Edvisors.com. All rights reserved.