How to decide how much to save for college
When it comes to paying for college only the wealthiest students do not have to worry about money. It is advisable to begin saving early. With luck, your parents will start this process for you, but with the costs rising every year even the best saver will have trouble paying for their schooling. The costs associated with going to school are expected to more than double in the next 10 years. Paying for college is made more complicated when you have to ask yourself if you are to stay in state or go to another or whether to pay for a private college or state school. There is also the question of how far you ultimately want to take your schooling. Will graduate school andPh.D. programs be in your child’s future?
Best Ways to Save for College
Fortunately, you do not need to have all the answers to your questions now on how to decide how much to save for college. There are several things you can do now to successfully save for your education. You can:
- Do your homework.
Begin looking at the costs of basic schooling now and double your intended amount saved. This means sitting down with a calculator and working with your budget to find more than the lowest amount to take out of your monthly paycheck. You do not need to plan out the entire amount that will be needed, but you will need to estimate a higher amount than what the current costs are projecting. This may be difficult especially with taxes going up and medical expenses climbing out of reach of even the best healthcare plan but needs to be done.
- Set a Monthly Goal.
When it comes to ways on how to decide how much to save for college. It is hard to save, but if you are able to refine your choices you will be amazed at the money you will find. Cut out one Starbucks coffee a week and you will have saved at least $30 a month depending on which drink you are not getting. It also means planning ahead and taking that extra savings a step further. You should consider a looking into a savings plan.
It is also recommended you visit an advisor and set up a 529 college savings plan. This is a tax-advantaged investment account similar to a Roth IRA. This is a tax-free growth and withdrawal plan that is qualified for higher education expenses. This includes covering tuition, room and board and a meal plan. This type of pan means much lower monthly contributions because the money is set to grow over time as the economy grows. For a child born in 2017, that means the $165 for a public in-state school or $260 for an out-of-state school or $325 for a private college.
A traditional savings account is not a bad way to go with the interest rates and the economy booming. You will want to adjust your rate of savings depending on the interests’ rates, which for some backs have risen above 2% since the rates started coming back up. Though that does mean you will still need to contribute more to the savings account upwards of $300. This type of account is a more secure investment because you are guaranteed not to lose any money as the market fluctuates.
A taxed investment account is still the better option in this low savings market. It will still yield better returns upward of 7 % compared with the average 2% savings account. It also allows for a lower monthly out of pocket contribution. The 529 plan has tax exemptions and dividends on your gains.
- Save Based on What You Can Afford
You should set your monthly savings goals based on what you can afford to put away every month. You should try to set aside a little each month even if your budget does not allow for much to be set aside. This will be different for every family. It should also be discussed as a family so all parties can do their part to help save up for the future. You can try breaking it down by using the Lumina Foundation’s Rule 10 formula.
It was said that originally families would need to save 10% of their discretionary income over a period of 10 years with the student working at least 10 hours per week to pay for their schooling. This is no longer the case. The Lumina Formula state that discretionary income is whatever is left over after budgeting for the house, food, health and car insurance and whatever else is required for day to day living. This is considered income above 200 % of the federal poverty level. Following this formula and adjusted for the current economic times, an income of at least $100,000 or more is needed to be able to save the 10% that is recommended to be put aside each month for savings.
You should also be prepared to adjust your monthly savings depending on what is occurring in your life that you do not expect like car repairs or braces for your child. These types of expenses are not expected though you should have the money set aside to make them should they occur. The 529 Savings plan is a good way to start saving for your child’s college and have the money grow over the lifetime of the account.
Pay for college should not be as hard as it has become; if you are a parent then you should start saving now. It does not matter whether they will be choosing a state school or a private institution; just knowing you are placing your child’s future at the forefront of your choices is satisfying. It also means a lot of the anxiety and worries about their future is taken away because you have done your best to prepare for them for their own future. It is also a way to be less surprised over the costs associated with their education eighteen years from now. It’s important to start early though. The sooner you plan for them, you will be in a better financial position.
