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Tiny payments can supersize your 529 plan

Posted: 2010-01-29 - Erin Peterson is a freelance writer based in Minneapolis.

by Erin Peterson

If you're eager to save some serious money for your child's education, sometimes the best way to think big is to think small.

If you have a regular savings plan in place, you can boost the bottom line even further with micropayments. These small payments of $5, $10, or $15 may be appropriate when you've got a bit extra in the savings account, when you skip the coffee shop or pack a lunch, or when you get a deal on a purchase and want your child's 529 account to benefit from the savings.

According to Russell Dunkin, a Certified Financial Planner at McKinley Carter Wealth Services in Wheeling, W.Va., the benefit of micropayments isn't just in dollars in cents. "The real value is the thought process that these contributions put you into," he says. "It's the idea that every small decision you make today is going to add up to something more valuable: college for your children."

To take advantage of micropayments, you'll need to make sure your plan allows it -- and that it's simple enough that you can contribute without any hassle.

Most plans have a minimum contribution to start -- some as little as $25 to $50, others as high as $1,000 or more. (You may be able to sidestep a high minimum requirement by enrolling in a program that automatically deducts a smaller amount from your bank account each month.) However, once you've hit that minimum, many programs will allow you to contribute any small additional amount each month. Even if your program requires contributions of $50 or $100 at a time, you can put small contributions into a bank account and sweep them into the 529 plan once you've hit the minimum threshold.

If you haven't started a 529 plan yet and plan to use this strategy, it's important to find a plan that makes contributing dead simple -- if it takes more than a few minutes to make the contribution, you may find yourself less likely to move the money over. If you've got a cell phone application that allows you to push money into the 529 account through a bill pay service or something similar, you can make the contribution before you find a new way to spend the money. "The sooner you get the money out of your pocket, the better," says Joe Orsolini, a CFP at College Aid Planners in Glen Ellyn, Ill.

Worried that a few dollars here and there won't add up? Think again. Contributing just $23.11 a month -- perhaps the savings from brown bagging it a couple times a month -- will grow to $10,720 in 18 years, the expected tuition for a semester of a public university education. "Even with small amounts, you're going to have the tax advantage and compounded growth," says Mary McConnell, director of college savings products for Charles Schwab in San Francisco. "When you run the numbers, even putting a small amount in is worth it."

In fact, micropayments may be the most valuable to those who can't swing large monthly contributions, says Dunkin. "People will contribute what they perceive they can afford, and then they often get stuck," he says. "But if you're someone who contributes $50 a month and then can make a few decisions a week that add a couple dollars, you could literally double your contribution every month."

Once you're in the right mindset, you'll likely see many different ways to save, whether it's using the savings as a carrot (when you've found a bargain that saves you $5 or $10) or a stick (perhaps you contribute $5 every time you miss a workout). You might decide that you'll push all your winnings from your weekly low-stakes poker game into the account, or set aside every $5 bill you get in change.

You can also get others to kick in a bit. "You could have friends or family who make small contributions for birthdays or the holidays," says McConnell. Knowing that they don't have to make a significant contribution to make a real difference may spur them to action.

That said, don't rely on small, irregular contributions to serve as the foundation of your savings, says Orsolini. "There's always something that can come along and take money out of your pocket, whether it's a vacation or just the Starbucks up the street," he says. "Make contributing to your 529 plan an automatic, regular part of your life, but consider these little extra additions the gravy on top."

Posted January 29, 2010

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