Saving for Your Child’s Education

Since your child will attend college most likely around age 18, you don’t want to start saving for college when he or she is 15. It doesn’t leave you enough time to save enough money.

The best approach is to start when they are born – even if you only save a little each year. The value of interest year on top of year (called compounding) can generate a lot of earnings. Furthermore, if you place the money in a Section 529 College savings plan (offered by large investing firms like Fidelity, Vanguard, T Rowe Price, etc.), you will not pay any federal or state income tax on the earnings. Instead, you can use all of that interest and saved tax to pay for major college expense like room, board and tuition. These type of funds usually charge a low management fee and offer age appropriate funds based on birth year. To maximize earnings and minimize risk, they typically are made up of high stock percentage (e.g. 95%) in early years and gradually reduce stock and increase more liquid asset types (CDs, US Treasuries, short term bonds) as your child grows older. This allows you to have the comfort of knowing a stock market dip or recession won’t impact your availability of funds when your child starts college.

Another risk reduction strategy is that these types of funds will diversify their investments of stocks and bonds across many companies to avoid the risk that one company’s financial failure or bankruptcy does not cause disaster for you. Normally they will create funds that track a basket of stocks – like S&P 500, Dow Jones Industrial average or Russell 2000 stock indexes.