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Saving for College

When is the right time to start?

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As a parent, you probably hope your child will attend college one day. It makes sense, then, that you would want to prepare for this continuation of their education, which in this day and age, can be quite costly! Saving for college will allow you to at least contribute to your child's educational costs, which will help keep them from having to take on so much student loan debt. 

But when should you start saving for college? Generally speaking, the answer is "the earlier, the better." But the more realistic answer is that it really depends on your financial situation.

How much debt do you have?

If your debt-to-income ratio is reasonable and you're not struggling to pay your bills month-to-month, then you can start setting aside a few dollars per month towards your child's education.

If you're overwhelmed by debt, on the other hand, it's a good idea to pay down your higher-interest debt before you start saving. You might be paying 10% or even 12% interest on a credit card, for example, which is a lot more than the 6% interest you might earn on your college savings. Once you've paid off high-interest debts and are just left with lower-interest debts like a mortgage and car payment, you'll likely be earning more interest in your savings than you are paying on your debts—which means it's time to start saving!

How much should you save?

This depends on your income and also on how many children you have. Few parents are able to save enough to fully cover their child's college expenses, especially if there are multiple children in the family. It is therefore helpful to set a reasonable goal and work backward from there.

For example, perhaps you have one child. You want to give them $20,000 towards their college education. You can use a compound interest calculator to figure out how much you need to save each month to meet this goal. If you have 12 years to save, you will need to make an initial investment of $100 and an additional monthly investment of $100 to have $20,000 in the end. This assumes a 6% rate of return, which is pretty typical of this type of investment.

This is one reason why it's so important to start saving as early as possible. If you want to save $20,000 and don't start until your child is six years from starting college, you'll need to save $237 each month to meet that goal.

You can also look at this the other way around. How much can you afford to save? Maybe you have $200 per month to dedicate toward saving for college over the next 12 years. You can use the compound interest calculator to see that this will give you $40,890, assuming a 6% interest rate. If that's enough, then great. If you'd rather give your child more, then you need to find a way to set aside additional savings each month. 

How should you invest your savings?

Whether your goal is to save $10,000 or $100,000, you should most likely put your savings in a 529 plan. This is a college savings plan that will allow your money to grow tax-free; your child won't have to pay taxes when they withdraw the funds, either. Your child will only be able to use the funds specifically for education.

It boils down to this: the earlier you start saving for college, the better. Prioritize paying off debt with a high-interest rate, and then start setting aside funds each month, so that your child has some savings to turn to when they begin their post-secondary education. 

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