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 8, 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 have served investors very well in the past (but which offer no guarantees for the future, of course) include Paychex (NASDAQ:PAYX), Southwest Airlines (NYSE:LUV), Wal-Mart (NYSE:WMT), Tootsie Roll (NYSE:TR), and PepsiCo (NYSE:PEP).
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 an actual person (a financial pro, no less) to talk to about your financial situation, look into our TMF Money Advisor. It's a valuable service we offering, featuring customized independent advice from a variety of objective financial experts. You need to make sure you're saving enough and well enough to meet all your needs -- if you need some help doing that, look into this offering.
