6 tricks to save money for your 529 plan

http://www.savingforcollege.com/articles/20101029-6-tricks-to-save-money-for-your-529-plan

From a distance, saving money for college seems remarkably easy: simply spend less than you earn and put the extra into a 529 plan. Unfortunately, the reality is slightly more complicated, says Kathleen Burns Kingsbury, a wealth psychology expert for KBK Wealth Connection in Easton, Mass.

"That strategy leaves out a huge piece of the puzzle, which is the human aspect of our relationship with money," she says. "By saving money in the long run, we deprive ourselves of something in the short run, and that influences our behavior, whether we're conscious of it or not."

If you understand the way your mind works, you can tap tried-and-true methods to take advantage of mental quirks to stash more money away in a 529 plan.

Get specific

People who know how much they need to save and have monthly targets are more likely to save than those who have more general goals, says Linda Pietroburgo, a principal at the Moneta Group in Clayton, Mo.

"You really need to sit down and think about how much you want to contribute to your child's college education and break it down to annual and monthly numbers," she says.

More important, determine how much you'll need in college savings if you start today versus next year or in five years. "If you can say to yourself, 'I know I have to save $500 a month from now on,' it's a lot easier not to capitulate, because you'll know that there are consequences for not saving," Pietroburgo says.

Use mental accounting tricks

If you have $1,000, you know that rationally you can spend it any way you want. But our brain likes to earmark money for specific purposes, and we tend not to like to take it out of that account or mental bucket to use it for something else, says Burns Kingsbury.

"You can use that idea of mental accounting in your favor by creating both a 'mental bucket' and an actual bucket such as a savings account or 529 plan. When the money goes into that bucket, you know it's (for) long-term savings and you're not going to touch it," she says.

You also can create a separate savings account where you can put in the cash you've saved by cutting your cable bill or from your tax refund. Once the account reaches $100, move it over to your 529 plan.

Automate withdrawals for your 529

Every time you siphon money from your checking account to a 529 college savings account, it can feel like you've spent a bundle without getting anything in return.

Indeed, economists have shown that we tend to be extremely "loss averse." That is, we hate to lose money more than we like to gain it. To avoid the sensation of loss, automate your monthly withdrawal for your 529 plan. "If you can set up an automated withdrawal from your paycheck, you'll never see that money," says Pietroburgo. "You can't miss something that you never see in the first place."

Automatically escalate your savings

Procrastination is a common problem when it comes to big savings goals such as retirement or college savings, says Jodi Beggs, a doctoral candidate at Harvard, where she studies behavioral economics.

"People see saving today as much more painful than saving tomorrow, even though we realize that tomorrow eventually becomes today," she says. To overcome this trap, set up a system that allows you to commit a portion of future pay raises to a 529 plan.

"Most banks are pretty advanced and offer functionality to start a recurring transfer at some defined point in the future. So, you can set it up to start that recurring transfer when those annual raises occur," Beggs says.

Visualize success

Visualization is a technique that helps people understand what it will feel like to achieve a goal even before they accomplish it, says Burns Kingsbury.

"When we're able to connect something that we're doing in the long term to something more immediate, it helps us stay focused," she says.

To help connect your short-term actions with a long-term goal, she suggests taping a photo of a child and a parent at a graduation ceremony to your credit card or wallet.

"Every time you see that photo, ask yourself what's more important -- that larger goal or this thing I'm buying right now?" Burns Kingsbury says. It won't prevent every impulse purchase, but it will force you to think though your decision.

Get help

Sometimes, reaching your goals requires nothing more than someone holding you accountable.

"When you're reporting your results to someone else, it's much harder to ignore them or not take action than when you're just reporting to yourself," says Burns Kingsbury.

Create a savings club or get a financial planner to help keep you on track. "When you've got someone sitting next to you saying, 'Hey, you've got a brand new sweater on but you didn't make that $100 deposit this month,' that will help to keep you on track," Burns Kingsbury says.

Posted October 29, 2010