Every investor wants to find a magical method for speeding up savings and increasing the return on investment. With college tuition inflation rates averaging about 6% to 7% over the last few decades, there is even more pressure on parents who invest in 529 college savings plans. Here are our favorite secret solutions for accelerating the growth of 529 plans.
- Shift the 529 plan to a more aggressive mix of investments. Switching the asset allocation to include more stocks will increase the return on investment. But, it will also increase the risk of investment loss, so it is best to have a high percentage of equities only when the child is young. When college enrollment approaches, it is important to switch to a less risky mix of investments. One approach is to start by sustaining a high percentage of stocks for several years by delaying the onset of an age-based asset allocation, since a traditional age-based asset allocation may adopt a more conservative mix of investments too quickly.
- Invest 100% in stocks. You can take this strategy to an extreme by investing 100% of your portfolio in stocks. If you pursue this strategy, it is best to invest in well-diversified stock funds, such as a total stock market fund, the S&P 500 or another broad-based market index. Plan on switching to a less risky mix of investments at least a few years prior to college enrollment, so you can choose to sell at a market high, instead of being forced to sell the investments at a market low because you need the money to pay the college bills.
- Appreciate the power of compound interest. When you reinvest earnings, you can earn earnings on the earnings. A measly 3% annual return on investment, when compounded, will increase your savings by a third over 10 years. As a famous scientist is rumored to have said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
- Use a college savings rewards card. 529 plan credit cards, like Upromise, provide rebates of 1% to 10% on your spending that can be automatically contributed to your 529 plans. This can add hundreds or thousands of dollars to your college savings plans. Get your family involved, and the rewards may multiply.
- Save more money. It may be obvious, but the more you save, the more money you have. Most of the money in a 529 plan comes from the contributions. Every dollar you save is a dollar less you’ll have to borrow. Instead of panicking when the stock market drops, increase the amount you save to compensate.
- Make saving automatic. Set up an automated investment plan, where money is transferred from your bank account to the 529 plan every month. This makes it much easier to save than if you had to remember to save. You will quickly get used to having less money to spend in your bank account. Some 529 plans can add the automatic transfer as a deduction on your payroll check, before it reaches your bank account. Remember to review the automated investment plan every year, to consider increasing the monthly contribution.
- Look for opportunities for lump sum contributions. Whenever you get a windfall, such as income tax refunds, bonuses, inheritances and lottery winnings, contribute at least half the money to your 529 plans. When you get a state income tax benefit based on your contributions to the state’s 529 plan, contribute the tax savings to your 529 plans.
- Save the spare change. Every day, dump your spare change in a jar or jug. Every so often, contribute the contents of the change jar to your 529 plans. You’ll be surprised how quickly pennies, nickels, dimes and quarters add up.
- Take your budget out for a tune up. Start a budget if you don’t already have one. A descriptive budget, where you track your expenses, will help you limit spending. Increasing awareness of spending is the first step in exercising restraint. Then, cut expenses to free up cash to contribute to your 529 plans. Delay major expenses, such as replacing an old car, roof or furnace. Find cheaper alternatives to current expenses, such as brown bagging lunches. Pay off high interest debt. Don’t buy stuff you don’t really need. Sell stuff you haven’t used in a year.
- Increase contributions as your income grows. Ask for a raise. If you get a raise, increase the amount of money you contribute to your 529 plans. If you don’t get a raise, start searching for a better-paying job. Get a part-time job in the evening and weekends to earn more money for college savings. An added benefit of working a side gig is you’ll have less time available to spend money.
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