First, get an idea of how much money you're going to need and how long you have until you need it. (Here's the scoop on what kinds of costs to expect.) Then you'll have an idea of how much money you're going to need to save and how much you'll need it to grow.
Start saving early -- as early as possible. The more time your money has to grow, the more it will grow. (In other words, to reach a certain dollar-amount goal, by investing earlier you'll have to invest fewer of your own dollars.) Here are some scenarios to consider:
- Invest $2,000 per year beginning when your child is eight, and, if you earn 10% annually, you'll end up with more than $30,000 by the time she's 18.
- Invest $5,000 per year beginning when your child is 10 (earning 10% annually), and you'll have more than $50,000 by the time he's 18.
- Invest $3,000 per year in the stock market from the time of your child's birth. If it grows at the market's long-term average annual rate of around 10% per year, by the time she's ready for college, you'll have a little more than $135,000.
These are just rough guidelines. During the years that you're investing, the market might do significantly better or worse than average. Your average annual return might be significantly higher or lower than 10%. (We had a spate of good years in the last decade, so dampened expectations are a good idea for the near future.) In addition, if you're investing in individual stocks instead of market index funds, you'll certainly fare differently than the market average. Companies selected carefully might do much better than average -- some companies that our Hidden Gems analysts currently like are Buffalo Wild Wings (NASDAQ:BWLD) and Select Comfort (NASDAQ:SCSS). (Click here and here for more information on those companies.)
To help you figure out your own particular situation, take advantage of online calculators that will do the math for you. You'll just need to plug in some numbers. Here's where you'll find some of these calculators:
- Finaid.com's college cost calculator.
- The College Board's college cost calculator.
- WiredScholar's college cost calculator.
For more info on saving for college, drop by the Fool's College Savings Center, and check out our book, The Motley Fool's Guide to Paying for School: How to Cover Education Costs from K to Ph.D., by Robert Brokamp.
And by the way, if thinking about investing makes your head hurt and you'd like some personal finance help, check out Motley Fool GreenLight.
This article was originally published on November 8, 2005. It was updated by Joey Khattab, who does not own any of the shares mentioned. The Fool has a disclosure policy.
