When times are tough, you have to prioritize your financial obligations. Given how hard it can be just making ends meet, trying to figure out how to save for long-term goals like retirement or helping your kids finance their college education may seem completely out of reach.
Yet with the cost of college on the rise and the importance of higher education to career opportunities, many parents want to do whatever they can to support their children and help keep their student-debt burdens down. The big question is this: How can you make every dollar you set aside count?
College saving 101
In this month's brand-new issue of the Fool's Rule Your Retirement newsletter, Foolish retirement expert and financial planner Robert Brokamp attacks the question of saving for college. With a simple approach, he covers not just how to save but also how much and what types of accounts you should use to reach your goals.
I'm not going to go into all the details here -- that's something that Robert does quite well, and I'd strongly urge you to take a look at the article and see for yourself what he has to say. Instead, I'd like to focus on a slightly different question: the types of investments you should choose for college savings.
In some ways, saving for college is like planning for any long-term goal. When your child is born, you know you have 18 years or so to save up whatever you're going to put aside for college before you need to spend it. Unlike other goals like retirement, though, college is nice because you can usually count on having to cover four years of tuition before calling it a day.
That leaves one big unknown variable: how much tuition will cost you. With prices on the rise, it's hard to predict what they'll be by the time your child is in school. Moreover, scholarships can save you a ton of money if your child is fortunate enough to receive one.
The flexible approach
That's why I recommend a three-step plan that allows for the give-and-take of changing circumstances rather than locking you into a rigid framework:
- If you have 10 years or more before you're going to need your college money, sticking almost entirely with stocks gives you the best growth prospects, especially as you're starting to ramp up your savings. You can even afford to make some aggressive investment plays. For instance, MAKO Surgical
has lost a huge amount of ground lately on fears that its growth is slowing. But if it can bounce back, it has huge upside potential -- just the sort of thing that could help make ends meet for your college savings. Similarly, 3D Systems (Nasdaq: MAKO) is at the cutting edge of a new technology that makes it easier to produce valuable goods. Even if you're stuck with set investment choices, you can often find aggressive-growth options that fit with this mentality. (NYSE: DDD)
- Once you get into the five-to-10-year range, stocks still make sense, but consider being a bit less aggressive with your investing. If you're scared of risk, sticking with low-volatility defensive stocks can help you sleep better. Individual stocks that meet that test include Procter & Gamble
and Coca-Cola (NYSE: PG) , with stable businesses and nice dividend yields to boot. If you don't have access to individual stocks, then Vanguard High Dividend Yield ETF (NYSE: KO) is just one of many ETFs and mutual funds that focus on stocks that provide high levels of dividend income. (NYSE: VYM)
- As your child approaches college, you'll want to cut back on your stock exposure dramatically. Unlike retirement, where you need to plan for your money to last 20 to 30 years or longer, you'll use your college savings in four years or less. That leaves you far less time to ride out a badly timed downturn, so start trimming risk early, with five or so years to go.
Believe it or not, the investments you make aren't necessarily as important as where and how you make them. That's why the advice that Robert provides in the latest Rule Your Retirement issue is so important. And with the service offering a 30-day free trial subscription for new readers, there's no reason not to take a look at what Robert has to say. His advice could save you thousands of dollars -- money that could make a huge difference to your child's education.
College saving is a tough burden, but it's not an insurmountable one. Let Rule Your Retirement show you the way to successful investing.