When you bring your child home for the first time, the last thing on your mind is how you're going to pay for a college education years from now. Yet it's never too early to start thinking about how you'll finance your child's college expenses, and the earlier you start, the easier it is to reach the ultimate goal.
Getting your bearings
Raising a child can be one of the most financially stressful things you'll ever do. Infants constantly need new clothes to replace what they grow out of. Whether you work and pay for day care or stay home to care for your child, the added expense or loss of income substantially reduces your disposable income. And even once your child reaches school age, increasing costs can stretch the budgets of even the most frugal families to the limit.
With all the challenges of paying for your child's current needs, it's easy to understand how future needs get pushed to the backburner. But with some simple tips, you can start on a simple investing plan that will get your kid through college.
1. Start small.
A lot of people believe that if they can't save a big amount, they shouldn't even both saving at all. But if you acknowledge the limitations of your current financial situation and still make the effort to do what you can, you'll have accomplished the single most important milestone in saving for anything: setting aside that first dollar.
For instance, go through your expenses from an average day. I'd imagine that most people can find $1 to cut, whether it's buying something they don't need or paying more than they need to for what they do need. Put that $1 aside, and it's $30 per month, $365 per year, and $6,570 over 18 years.
2. Keep building.
Now granted, $6,570 won't get your child past the first semester at most schools these days, let alone years down the road. But you'll find that because you've started saving, you already have the groundwork in place to build on that saving further down the road.
In particular, identify opportunities for you to boost your saving over time. Here are some ways:
- When you get a raise at work, earmark a small portion of the raise for college.
- Take 10% of your tax refund every year for your college fund.
- When unexpected windfalls come in, whether it's a work bonus or something like proceeds from a garage sale, set part of them aside for college.
Slowly but surely, that $30 per month will grow to $60, and then $90, and so on. It's not easy, but before you know it, your college savings will be much larger than it was.
3. Make low-cost investments.
Having worked so hard to save that money, the last thing you want is to pay it over to Wall Street's finest. Luckily, you don't have to.
There's a huge number of complicated ways to invest your college savings. Do some research and you'll run across strange-sounding things like 529 college savings plans and Coverdell ESAs, which you'll learn more about in future articles in the coming weeks. For now, though, informally setting money aside in an account you set up for yourself is an easy way to maintain complete access to whatever investments you want.
With Charles Schwab, Fidelity, and Vanguard offering commission-free ETF trading, low-cost exchange-traded funds make the perfect way to get started. For a child with 15 years to go before college, for instance, you could consider an aggressive portfolio like the following, composed entirely of no-cost ETFs from the relevant broker:
- For Vanguard: 50% Vanguard Total Stock Market (NYSE: VTI), 25% Vanguard Europe/Pacific ETF, 15% Vanguard Emerging Markets Stock (NYSE: VWO), 10% Vanguard Total Bond Market (NYSE: BND).
- For Fidelity: 35% iShares S&P 500, 15% iShares Russell 2000 ETF (NYSE: IWM), 25% iShares MSCI EAFE Index (NYSE: EFA), 15% iShares Emerging Markets (NYSE: EEM), 10% iShares Barclays Aggregate Bond (NYSE: AGG).
- For Schwab: 50% Schwab US Broad Market, 25% Schwab International Equity, 15% Schwab Emerging Markets, 10% Schwab Intermediate-Term US Treasury.
Of course, investing in stocks brings no guarantee that your money will grow. But with safer alternatives paying next to nothing right now, stocks are the best game in town -- and historically, they've responded to bad periods like what we've seen recently by posting stronger growth.
Don't wait another day!
Times are tough, and saving for college is an easy thing to put off. But by making even a modest start now, you'll set the stage for a successful long-range savings plan.
Stay tuned each Wednesday in September and October as Dan goes through the ins and outs of saving and paying for college.
