Introduction to College Savings

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Saving for your children's college tuition can be daunting if you're not comfortable with the basics. So, here's a simple summary of the most important parts of the process. 

  1. Begin with a realistic budget
    Whether you're saving for your own children or your grandchildren, you've got to start with a realistic budget that doesn't hinder your ability to save for your own retirement. If you're trying to save for an only child and you have excess income (even after funding your retirement plan), you might aim for paying all of their future college expenses. Or, if you're starting supplemental college savings plans for your 5 grandchildren, a realistic goal might only cover one year of books for each of them. You must base the decision on a real analysis of what's possible given your specific situation.
  2. Understand the benefits of a 529
    You can save for college in any vehicle you'd like, but be sure to study up on 529 plans before you begin. They are specialized accounts for saving towards college expenses that give you the potential for tax-free growth. Let's say you can set aside $1,000 per year for 18 years and you deposit the cash in a 529 investment account. If that account earned ~6% every year (who knows, but it's possible), then that $18,000 you saved would have made you an additional $12,000+ to use towards college expenses. And you would owe no taxes when using that money towards qualified expenses.

    Of course, there are certainly risk involved. There's no guarantee you'll earn any new money on top of what you've saved. You could even lose money. And, there's no guarantee the kids will go to college. But, let's table that for a later conversation. For now, just understand that a 529 is a great option if you can save in advance and your kids/grandkids are likely to attend college.
  3. Start saving now
    Don't worry about whether you're early or late. It's always a good time to start saving. To the extent that you can get money set aside (even if it doesn't have time to grow) you're doing yourself a favor and getting ahead of the massive cost of attending college.

We'll continue with a deeper dive on 529s, financial aid, and other topics, so stay tuned...