subject: How To Save For Your Childs College Education [print this page] How To Save For Your Childs College Education
I think that we can all agree that getting a good college education is one of the most important parts of a child's life and paying for college is one of the most important responsibilities we have as parents; yet most of us do a notoriously bad job of saving for their children's college education.
Today I'm going to talk about a foolproof plan that you can create immediately to make sure that your child has money set aside for college when the time comes.
Saving money is hard enough for most people. Here in America we're just not geared towards it. We are a consumer society, we like to spend money, not save it.
But that's not the most difficult aspect of financing your children's college education, no... the hard part is determining what to invest that money in so that it grows at a nice rate and isn't at risk from a wild swing in the stock market.
Some people simply choose to stick the money in a savings account. I recommend against that because savings accounts are very easy to raid when times get tough and you need some extra cash. Sure, you mean to pay it back but something always comes up and it never quite works out that way.
Still others choose to invest in certificates of deposit at their local bank, or CDs as they are referred to. This is a little bit better because most CDs lock you in and don't allow you to cash them in right away. The problem here is that CDs payout piteously small returns. You'd almost be just as well off sticking the money in a mattress, especially when you calculate for inflation.
So what's a parent to do?
The answer is in three parts. First, open a free 529 college plan with your state. You can find information about 529 plans online, but basically they're a way to invest money for college education that is tax-free to your child if used for college purposes.
Second, set aside a certain amount to be automatically deposited into your 529 college plan every single month. I don't care how much it is, though obviously the more the better depending on how long you have until your child goes to college. But anything is better than nothing, even if it's only five dollars a month or $20 a month.
Either set it up to direct deposit from your paycheck through your job, or set it up to direct deposit out of your bank account yourself every single month.
Third, choose the correct investment vehicle. Invest that money in a broad market index fund that attempts to simulate the entire stock market. Look for something that's comparable to an S&P 500 index fund.
529 college plans are administered by the state and your investment options will be limited, but if you pick a fund that attempts to mimic the overall stock market, then you should enjoy those historic 7 to 8% gains that the stock market as a whole offers year after year.
