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04/12/2018

Efficient College Savings Plans for Every Parent

The cost of a college education these days is, can be as high as $30,000 a year. Since more careers are requiring an advanced degree, the cost is even more. Of course, you’ll want your student to apply for all kinds of scholarships and financial aid, but be prepared to spend a substantial sum for his/her higher education nonetheless. It pays to know some basic principles for how to create an effective college fund for your child.

The best advice for an effective college fund plan is to start as early as you can. Many parents wait until their children are in high school before they even begin thinking about college costs. Although it is not impossible, you will have a much greater chance to adequately save for college if you start when your kids are very young, or maybe even before they are born. Begin investing early in a 529 College Savings Plan, where the earnings on your investments grow tax-free as long as you use the funds for tuition or college related costs such as textbooks. Contributions are also deductible in some states. You can invest in whatever dollar increments you like (even small contributions will make a difference over time), and have the payments automatically deducted from your bank account once or twice a month (it is proven that this type of “automatic” savings is more successful because you don’t have to think about it and since you don’t write a check, there is no temptation to skip a payment, for example.).

Your 529 Savings Plan can invest in various types of mutual funds. Since you have a 15 to 20 year time horizon, it makes sense to invest more aggressively in mid or low cap stocks to maximize your return. As the Plan balance grows and your student gets older you’ll want to gradually shift your investment allocations to less risky, more stable options such as high cap stock, bonds or cash. Virtually any company that offers financial services, including banks, investment companies, and some insurance companies, will offer a 529 Plan.

Finally, be prudent and do your research, not only concerning investment returns but also plan fees and fund expenses. Many mutual funds offer higher returns but have abnormally high fees and expenses, which can significantly reduce your net earnings. Consider investing in Exchange Traded Funds (ETF’s) that track a stock or bond index (and therefore will have similar returns), and typically have very low fund fees. It is best to consult your financial advisor for these specific investment decisions.

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