How To Start a College Fund
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By Amanda of The Naked Ledger who will be contributing her financial wisdom to the Guide to Everything weekly
After eight years of giving financial advice to individuals, couples and families, I ditched the proverbial pantyhose to stay home with my toddler. Four years and another baby later, I still love giving those money muscles a good workout. Friends ask me all the time about how to save for college and here’s what I tell them.
There are a thousand and one ways to pay for college and only ONE WAY to pay for your own future financial well-being and that’s to save and invest your money. Saving for college should be the very last duck in a very long row of ducks, including a retirement plan, an emergency fund, plenty of insurance and everything in between. I know it seems counter-intuitive that college should come last because as far as your time horizon is concerned, it’s the bill you get hit with first, but it’s true. I’ve seen far too many people in their sixties wake up and suddenly wonder where their retirement plan is and sadly it’s usually hanging on the wall of their kid’s house signed by a University Chancellor. If your kids are determined to go to college, the fact that you didn’t save enough money for it won’t stop them. It sure as hell didn’t stop me.
2. Choose a 529 Plan.
That said, once all your mallards are flaunting their feathers, go ahead and look for a 529 Plan. Unlike a regular savings account for a minor (UTMA/UGMA), a 529 is specifically and exclusively for college. It is not tax deductible, but you fund the plan in today’s after tax dollars and the account grows tax free no matter how much it earns. As long as the money is spent on college expenses, it can be withdrawn federally tax-free (and in some cases, state-tax free as well). A huge benefit of these plans is that the parent controls the funds for life, which means that there’s no chance Danny is going to turn 18 and spend his college money on a Corvette. 529 plans have an owner (you) and a beneficiary (your kid) and you can change the beneficiary to another family member at any time, just in case Danny moves to Guatemala instead of getting a degree.
3. Complete the college savings plan application online.
Unfortunately, I don’t know you, so I can’t say EXACTLY which 529 plan you should choose, but I can say that every state has a plan and ANY plan is better than none. There is high quality objective research available at: http://www.collegesavings.org. Do your homework and look for a plan that has low fees and good performance. Once you’ve selected the plan, fill out an online application IMMEDIATELY. College savings accounts don’t grow from good intentions alone.
4. Fund the college savings plan.
Once you’ve picked a plan and filled out the application, it’ll be time to select an investment option. It’s no secret that things are SCARY out there right now and not everyone is comfortable investing in the stock market. Fortunately, most 529 plans have multiple investment options ranging from ultra-conservative state treasury funds to age-based asset allocation portfolios. Pick the type of fund that will allow you to sleep at night. The main goal of a college savings plan is to keep up with the outrageous inflation on college tuition, so keep that in mind when you choose. Many plans can be opened with as little as $25, so the fact that you haven’t won the lottery yet should not stand in your way of getting started.
5. KEEP funding your college savings plan
If you’re serious about helping your kids pay for college then the best way to make that happen is to a) take care of your own financial health first (see #1) and b) fund the college savings plan slowly and steadily. Pick a monthly amount for each child and stick to it. Personally, we set aside $150 per child per month. It’s not enough to fully-fund even the most inexpensive of college experiences, not even close, but it’s a start. Finally, once you’ve opened the account and begun funding it yourself, don’t forget to advertise it to the grandparents!