COLLEGE SAVINGS 101

Savingforcollege.com

The price of procrastination: 7 reasons to start saving today
http://www.savingforcollege.com/articles/the-price-of-procrastination-7-reasons-to-start-saving-today-925

Posted: 2016-05-02

by Kathryn Flynn

I haven't had time to research and/or understand the best options; I don't have enough money to save; My child is a newborn; I've procrastinated. Sound familiar? According to Savingforcollege.com's annual College Savings Survey, these were the most common reasons people put off saving. Yet while college may be the last thing on a new parent's mind, there are a number of benefits to starting to plan early.

When it comes to saving for college, if you're a member of the "I'll do it tomorrow" club, here are seven reasons to get motivated:

1. You'll benefit from the power of compounding

A 529 plan operates much like your 401(k) or IRA, where there's an opportunity to earn interest on top of interest. And just like your retirement account, earnings in a 529 plan grow tax-free as long as the funds are used to pay for college expenses.

Because of this tax-free compounding, waiting to start saving can have a huge impact on how much you'll have in your account when it's time for college. Let's say you have a new baby and you plan on sending her to your in-state public university that currently costs $25,000 a year. If you start saving today, you'd have to contribute $464 each month into a 529 plan in order to be able to cover the $215,064 tuition bill (assuming a 4% college inflation rate and a 6% annual investment return).

figure 1

Yet many new parents get caught up in the excitement of having a newborn and few spend any time thinking about future college costs. Years can go by before you finally make time to explore the idea of a 529 plan. But each day you wait you lose out on potential savings. In fact, if you wait just five years and start making contributions when your daughter is in kindergarten, you'll end up having to deposit over $40,000 more over time than if you had started saving when she was a newborn. Don't believe it? See for yourself with the Price of Procrastination Calculator.

figure 2

College Savings Bank

RELATED: The magic number for college savings

2. You'll have more time to develop your savings plan

Setting a clear goal for your college savings will help you stay motivated and give you the ability to develop an effective plan. But don't let deciding on that goal slow you down; it's more important to start saving as soon as possible than to have everything perfect. If you have a young child you probably don't know where they will end up going to college or how much it will cost, but that shouldn't stop you from starting to save immediately and developing your plan as you go along.

Get started with free tools like Savingforcollege.com's College Savings Planner to help you estimate future college costs based on whether you're thinking about a public, private, in-state, out-of-state, two-year or four-year school. You can then calculate the amount you'll need to put away each month in order to meet your goal in time to pay the first tuition bill. The sooner you start saving, the smaller your required monthly contribution will be.

3. You'll be better prepared should your income change down the road

Having a set savings goal is great, but as we know life doesn't always work out according to plan. You or your spouse may experience a job loss or decide to cut back on work to spend more time with family, or you might some day move into a larger (and more expensive) home to accommodate your growing family. While there are a number of different reasons why you might stop or reduce your 529 plan contributions, the fact is that you'll always be better off having some money in the account to begin with.

4. There will be more opportunities to save when your children are young

Have you noticed how many presents babies get during their first year of life? Between the baby shower, coming home from the hospital and the first birthday party, most babies will accumulate more than enough onesies and pricey gadgets than they'll ever need. This is the perfect time to set up a 529 plan and ask friends and loved ones for contributions in lieu of gifts. Most plans offer easy ways to make secure electronic deposits, and gift givers appreciate not having to make a trip to the store. What's more, contributing to a child's college fund is a meaningful gift that will have a lasting impact on their future.

RELATED: College savings timeline for new parents

5. Your kids will get more expensive

While diapers, formula and other baby expenses might seem out of control, just wait until you start paying for things like little league, ballet class and preschool. According to a study from the Economic Policy Institute (EPI), it costs as much to send a child to preschool as it does to send an 18 year-old to college.

As your child grows, it will only get harder to find room in your budget for college savings. By starting early, you can set up automatic deposits from your bank account and get into the habit of saving a specific amount each month.

6. You'll be less likely to tap your retirement fund to pay for college

According to T. Rowe Price's Family Financial Trade-Offs Survey, 59 percent of parents say they would put off saving for retirement so that they can help pay for their kids' education, and 30 percent say that they are using their 401(k) to save for college. There are a number of reasons why these are generally not good ideas. First, you'll end up paying fees for taking early withdrawals from your retirement account, and potentially more in taxes. What's more, if you liquidate the account you won't have as much time to grow your balance to what it was.

One way to avoid having to touch your retirement savings is to save for college in a separate account, such as a 529 plan, and start as soon as possible. If your child has 18 years until college, monthly contributions to a 529 plan of just $100 can grow to $38,000 (assuming a 6% annual investment return). At today's prices, that could cover two years of tuition and room and board at an in-state public university. And remember, you or your child can always take out student loans to pay for the rest but there are no loans for retirement.

figure 3

"...monthly contributions to a 529 plan of just $100 can grow to $38,000 (assuming a 6% annual investment return)"

7. 529 plans are flexible

Worried that your son or daughter might not to go to college? That's definitely a possibility, but most careers still require some courses or training. If you save with a 529 plan, you'll be able to take tax-free withdrawals to pay for all sorts of post-secondary education, including culinary school, trade school and community college. And if your child really has no use for the money, you can change the beneficiary to another qualifying family member who is planning to go to college. You can use the funds to further your own education, or save for a future grandchild. No one knows exactly what the future holds, but it's always better to have some savings in your pocket rather than none.

RELATED: 5 types of students who benefit from 529 plans

I haven't had time to research and/or understand the best options; I don't have enough money to save; My child is a newborn; I've procrastinated. Sound familiar? According to Savingforcollege.com's annual College Savings Survey, these were the most common reasons people put off saving. Yet while college may be the last thing on a new parent's mind, there are a number of benefits to starting to plan early.

When it comes to saving for college, if you're a member of the "I'll do it tomorrow" club, here are seven reasons to get motivated:

1. You'll benefit from the power of compounding

A 529 plan operates much like your 401(k) or IRA, where there's an opportunity to earn interest on top of interest. And just like your retirement account, earnings in a 529 plan grow tax-free as long as the funds are used to pay for college expenses.

Because of this tax-free compounding, waiting to start saving can have a huge impact on how much you'll have in your account when it's time for college. Let's say you have a new baby and you plan on sending her to your in-state public university that currently costs $25,000 a year. If you start saving today, you'd have to contribute $464 each month into a 529 plan in order to be able to cover the $215,064 tuition bill (assuming a 4% college inflation rate and a 6% annual investment return).

figure 1

Yet many new parents get caught up in the excitement of having a newborn and few spend any time thinking about future college costs. Years can go by before you finally make time to explore the idea of a 529 plan. But each day you wait you lose out on potential savings. In fact, if you wait just five years and start making contributions when your daughter is in kindergarten, you'll end up having to deposit over $40,000 more over time than if you had started saving when she was a newborn. Don't believe it? See for yourself with the Price of Procrastination Calculator.

figure 2

College Savings Bank

RELATED: The magic number for college savings

2. You'll have more time to develop your savings plan

Setting a clear goal for your college savings will help you stay motivated and give you the ability to develop an effective plan. But don't let deciding on that goal slow you down; it's more important to start saving as soon as possible than to have everything perfect. If you have a young child you probably don't know where they will end up going to college or how much it will cost, but that shouldn't stop you from starting to save immediately and developing your plan as you go along.

Get started with free tools like Savingforcollege.com's College Savings Planner to help you estimate future college costs based on whether you're thinking about a public, private, in-state, out-of-state, two-year or four-year school. You can then calculate the amount you'll need to put away each month in order to meet your goal in time to pay the first tuition bill. The sooner you start saving, the smaller your required monthly contribution will be.

3. You'll be better prepared should your income change down the road

Having a set savings goal is great, but as we know life doesn't always work out according to plan. You or your spouse may experience a job loss or decide to cut back on work to spend more time with family, or you might some day move into a larger (and more expensive) home to accommodate your growing family. While there are a number of different reasons why you might stop or reduce your 529 plan contributions, the fact is that you'll always be better off having some money in the account to begin with.

4. There will be more opportunities to save when your children are young

Have you noticed how many presents babies get during their first year of life? Between the baby shower, coming home from the hospital and the first birthday party, most babies will accumulate more than enough onesies and pricey gadgets than they'll ever need. This is the perfect time to set up a 529 plan and ask friends and loved ones for contributions in lieu of gifts. Most plans offer easy ways to make secure electronic deposits, and gift givers appreciate not having to make a trip to the store. What's more, contributing to a child's college fund is a meaningful gift that will have a lasting impact on their future.

RELATED: College savings timeline for new parents

5. Your kids will get more expensive

While diapers, formula and other baby expenses might seem out of control, just wait until you start paying for things like little league, ballet class and preschool. According to a study from the Economic Policy Institute (EPI), it costs as much to send a child to preschool as it does to send an 18 year-old to college.

As your child grows, it will only get harder to find room in your budget for college savings. By starting early, you can set up automatic deposits from your bank account and get into the habit of saving a specific amount each month.

6. You'll be less likely to tap your retirement fund to pay for college

According to T. Rowe Price's Family Financial Trade-Offs Survey, 59 percent of parents say they would put off saving for retirement so that they can help pay for their kids' education, and 30 percent say that they are using their 401(k) to save for college. There are a number of reasons why these are generally not good ideas. First, you'll end up paying fees for taking early withdrawals from your retirement account, and potentially more in taxes. What's more, if you liquidate the account you won't have as much time to grow your balance to what it was.

One way to avoid having to touch your retirement savings is to save for college in a separate account, such as a 529 plan, and start as soon as possible. If your child has 18 years until college, monthly contributions to a 529 plan of just $100 can grow to $38,000 (assuming a 6% annual investment return). At today's prices, that could cover two years of tuition and room and board at an in-state public university. And remember, you or your child can always take out student loans to pay for the rest but there are no loans for retirement.

figure 3

"...monthly contributions to a 529 plan of just $100 can grow to $38,000 (assuming a 6% annual investment return)"

7. 529 plans are flexible

Worried that your son or daughter might not to go to college? That's definitely a possibility, but most careers still require some courses or training. If you save with a 529 plan, you'll be able to take tax-free withdrawals to pay for all sorts of post-secondary education, including culinary school, trade school and community college. And if your child really has no use for the money, you can change the beneficiary to another qualifying family member who is planning to go to college. You can use the funds to further your own education, or save for a future grandchild. No one knows exactly what the future holds, but it's always better to have some savings in your pocket rather than none.

RELATED: 5 types of students who benefit from 529 plans

 

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