Setting up recurring automatic contributions to your child or grandchild’s 529 plan is a convenient and effective way to save more for college. This strategy, also referred to as automatic investing, works by scheduling regular deposits from a paycheck or linked bank account.
When contributions are automated, you won’t be tempted to skip a month and spend the money on something else. You’ll also be able to minimize investment volatility and take advantage of market trends.
Here are three reasons to consider automating your 529 plan contributions.
You Can Set It and Forget It
Once you schedule a recurring 529 plan contribution, there’s nothing more to do except sit back and watch your college savings grow. This “set it and forget it” method is an easy way for families to stay on track to meet their goals. You can build up your savings without having to worry about making a manual deposit each month.
After you set up the automatic contribution, be sure to take note of your automatic transfer date. If you use a personal finance app like Mint or YNAB, you can enter the transaction in your monthly budget. The same amount is deposited each month, so there won’t be any surprises.
You’ll Likely Save More for College
Without a scheduled automatic transfer, it can be easy to forget or skip a monthly contribution once in a while. But missing just a few deposits a year can have a big impact on your 529 plan savings.
Remember, investments in a 529 plan grow on a tax-deferred basis. Each day you wait to save you potentially miss out on earnings that will compound over time.
Here’s an example: Let’s say you plan to save $200 a month from the time your child is born until they enter college. Assuming a 6% annual interest rate, you would be able to save around $70,000 by the time your child enters college1.
If you don’t set up automatic contributions, you risk forgetting to make deposits each month and coming up short of your goal. For example, if you only make a contribution once a quarter (four deposits per year), your balance shrinks by around $46,000.
You’re Able to Take Advantage of Dollar Cost Averaging
With automatic investing, you’re depositing a fixed amount on a regular basis. Your contribution buys shares of investments within your 529 plan. The amount of shares you’re able to buy is determined by the value of the investment at the time of purchase.
In other words, you buy more shares when prices are low, and fewer shares when prices are high. As a result, your average cost per share may be lower than if you manually tried to time the market.
Automatic investing also minimizes the impact of emotional investing. For example, you might be tempted to reduce or stop your contributions when markets are down. But by doing so, you’re essentially locking in your losses. Families who stick with a recurring contribution may be able to purchase shares at a low price and benefit once the market recovers.
How to Set Up Automatic Contributions
Almost every 529 plan offers automatic contribution options. Some 529 plans reduce their minimum contribution limits when the account owner signs up for an automatic investment plan. Other 529 plans, such as the LearningQuest 529 Education Savings Program, have no minimum contribution requirements. Families can choose to save as much as they want, as often as they want.
In most cases, you can schedule your recurring contributions on your 529 plan’s website. You can set up deposits to come from your paycheck, bank account, military allotment or Social Security payment.
And don’t worry, you’re not locked in. You can change or stop your recurring contributions at any time if your financial situation changes.
Automating 529 plan contributions is a proven strategy to help families build a substantial college fund. It’s easy to get started, and once your plan is in place there’s nothing more to do.
