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Most American families must plan ahead for the
cost of college. That means putting money aside
each month and investing it for long-term growth.
Beginning when you have plenty of time means fewer
burdens on you - and your kids - when it's time
for them to head off to college.
What it costs to go to
college
College costs vary and depend largely on
whether you plan to send your child to a private
or public college.
| Annual College Costs 1999 - 2000:
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| Source:
College Board |
That's what college costs today. So if you're
starting early - maybe 15 years away from sending
your child to college - those numbers will look a
lot different in the future.
Assuming that college costs rise at an average
annual rate of 4% over the next 18 years, for a
child born today the total cost of a four-year
education at a state university would be about
$90,000 while the costs of a private school would
reach $200,000.
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You'll want to minimize your
reliance on student loans. A $20,000 loan might
not sound that much in return for a good
education. But at a 7.5% interest rate will need
your child to pay $237.40 each month for 10
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Why begin early
Although assumptions such as the inflation rate
and your investment rate of return are not
predictable, one thing is clear...if you start
early, the burden is less than if you wait.
For example, if you've got a newborn and you
want to send the child to public school 18 years
from now, then you must set aside $211 per month.
If you wait until that child is 10, then you must
save $347 per month. Numbers for a private school
are more eye-opening. If you were to start when
your child is first born, you'd need to set aside
$526 a month. If you wait until the child is 10 -
$865.
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Click
here for a calculator that helps you figure
out how much you should set aside each month,
based on your child's age and whether you intend
to send him or her to a private or public
college. |
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| These
numbers assume an 8% investment return and 6%
inflation rate. If your rate of return is lower,
or college inflation is higher, then these
numbers will have to be revised
upward. |
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When given enough time, even
a small investment can become large - because of
the power of compounding. Here's how it works:
When you invest your money, you can earn
investment returns. Then over time, you can earn
returns on the money you originally put in, plus
on the returns you've already accumulated. As
the size of your investment grows, you can earn
gains on a bigger pool of money. |
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Where should you put your
money?
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Owning individual securities
can be risky. If one stock or bond performs
poorly, your whole portfolios could be affected.
For this reason, mutual funds may be a better
fit for you. Generally, mutual funds distribute
money across many different stocks and bonds -
which can reduce your investment risk. |
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You can use a mutual fund to fund a plan with
tax advantages. Among those plans are custodial
accounts, 529 plans and education savings
accounts.
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In the process of
saving for college, do not neglect your own
retirement plan. If you have to make a choice
between your own financial security and a
child's education, remember that unlike college
students, it is not easy to finance your
retirement. Click
here for more
information about retirement planning.
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| Saving
for college vehicles |
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What is a mutual fund?
It's an
instrument that invests in many types of stocks,
bonds and cash - or a combination of all three.
With a mutual fund, you can spread your risk
among several investments, versus just one
stock. | |
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