Remember how awesome college was? Amidst all the glory, you probably thought, “Man, I can’t wait to give my kid this experience one day!”
Well, okay. Maybe you didn’t think that. Maybe you were avoiding the thought of children altogether. But if you got ’em now or you’re thinking about having them in the future, there’s good news and bad news.
Let’s get the bad news out of the way: college has gotten ridiculously expensive. Tuition/fees are rising quicker than inflation. From 2004–2014 alone, the average combined cost of tuition and fees at an American private nonprofit college shot up 25%. And unfortunately, public schools are no exception to the tuition hike.
OK, pause. Time for the good news!
If you start putting away a little money for your kid now, you may be in luck by the time they get to college. While a $20,000+ annual price tag isn’t easy to overcome at once, if you start investing ASAP, by the time your kid is college-bound you won’t need to scramble for cash. Emphasis on ASAP. When it comes to saving money, time is your biggest asset, and time is on your side.
How Much Is Needed To Save For College?
A college savings plan might seem like an uphill battle. You might not have a lot of money in the first place. So, how much to save for college? What if you can only put aside $100 a month? That means that after a year, you’ll have $1,200, and after eighteen years you’ll have a mere $21,600. That’s less than a year of tuition, room and board at some colleges today. It’ll barely cover your college costs in the future, right? There’s no point in saving.
One of the biggest misconceptions about saving money is that you get back exactly what you put in. This is a normal way of thinking. After all, when you were a kid and you saved five dollars every week, at the end of the month you had twenty. Simple math, right?
Luckily, when you’re an adult, saving money doesn’t have to mean literally preserving cash. Well, it could. But there are two big reasons why you can benefit from investing, instead of just putting aside, your money.
The first is because when it comes to a college savings plan, putting cash in a “savings account” as opposed to investing it actually, well, loses you money. That’s because college tuition is rising faster than inflation, and when you put money in a savings account it typically loses value due to inflation. That’s called compound inflation, and it sucks.
The second reason you should invest money as opposed to put it into a savings account is because of compound returns. Unlike compound inflation, compound returns are a good thing. Let’s talk about how they work.
The Magic Of Compounding
When you invest money, it earns returns, including dividends. These returns are essentially money you did no work to earn. If you keep your initial deposit invested along with the returns it’s earned, those returns should earn more returns. Those returns will earn further returns. And so on and so forth. Therefore, the sooner you invest, the greater the likelihood your returns will be higher.
So, wondering how to pay for college? Let’s say your goal is to save $134,000 for your child’s college tuition.* You opt for investing money in an investment account with an estimated expected return rate of 6%. If you started investing the year your child was born and the return rate of 6% held, you’d have to deposit around $346 every month for eighteen years to meet your goal.
But if you started investing for college when your child is 15, you only have three years to invest before it’s time for your child to attend college. To make up for the time lost, you need to amp up how much money you deposit monthly to $3,407.
That’s a pretty unmanageable monthly deposit!
We can all agree, you’ll miss $346 a month a lot less than you’ll miss $3,407. $346 is around $86 a week. While not inconsequential, saving that money is doable. Saving $3,407 a month would require you to stash away nearly $852 a week, which is downright jaw-dropping.
How To Save For College: Bottom Line
Even if you’re in debt, even if you can only invest $100 a month (or $50, or $25, or $10!) something is always better than nothing. “Something” can acquire returns and make you money. “Nothing” can’t. The sooner you invest, the more money you have for your child’s college savings plan.
The fact of the matter is, as frightening as the rising costs of college are, as fear-mongering as the headlines would lead you to believe, you will be able to help pay for your kid’s college fund. The power is in your hands.
Go get ‘em.