You recently had a new baby. Right now, you are officially in “new parent mode.” You are changing diapers, feeding the baby, and crossing your fingers that you will get the occasional afternoon nap in so you can survive those long sleepless nights when the baby is fussy.
You have a lot on your mind right now in having a happy and healthy baby while ensuring you are meeting all your financial obligations. Yet there is something else that you need to place on your to-do list for your child’s benefit. You should start saving money so you can pay for your child’s future college expenses. Yes, it may seem a little early to be thinking about your newborn’s college, but compound interest will be your best friend over the next 18 years.
Saving for College Starts Early
Many parents want to help their children with their college costs so their kids carry less student debt in their early adult years. Unfortunately, some parents don’t think about saving money until their kids are in high school. So there are only 4 short years to save up for your child’s tuition. If you have multiple children close in age, this challenge can quickly become a financial nightmare.
Using such a short time span to save for college can put huge strains on your finances. You may end up only saving a nominal amount, or giving up entirely. As a result, your child has to seek out other financial means, may decide to change their college plans, or they put off going to college until a later time.
When to Start Saving for College
Consider starting a college fund when your child is still an infant. By starting at this time in your child’s life, you can place away a smaller amount of money into an account that can grow due to the compounding interest.
For example, if you put $100 into a specific savings account for your child’s education and deposit an additional $100 a month at 3% annual percentage yield (APY), your balance would be nearly $29,000 in 18 years.
Saving $100 a month for 18 years is a lot easier than trying to save $7,000 a year for 4 years while your child is a teenager in high school. Most parents simply can’t save such a high amount in a short period of time just to get a balance of $29,000.
Increasing Your Deposits
As your child becomes older and you advance in your career, you may be able to contribute more each month to your child’s college fund. In the example above, you invested $100 a month at 3 percent APY for 18 years to reach nearly $29,000.
However, if after 10 years of investing you were able to increase your monthly deposit to $250 for the remaining 8 years at the same 3 percent APY, your final balance would be nearly $45,000. You can see just how great little tweaks can impact your final balance with time and compound interest.
Avoid Using Your Retirement Funds for Your Child’s College Costs
One of the key advantages of saving early for your child’s tuition costs is that you won’t have to dip into your retirement savings. Some parents will use their retirement funds to pay for their child’s college expenses, and they ultimately end up using up all their own savings. This trend is becoming too common as many baby boomers are working well into their golden years because Social Security benefits don’t cover all their living expenses.
To avoid making this drastic decision, saving a smaller amount of money early as your child grows up will be easier on your finances. Save for your own retirement first; then, put aside what you can in a separate account for your child’s future college. Remember, time and compound interest go hand-in-hand when it comes to growing your child’s college fund. Get started today!
We’re Here to Help!
If you have questions on opening a separate savings account for your child’s college or would like to explore additional savings options, stop by or give us a call at 801-451-5064.