College Savings Timeline: Time to get in gear

http://www.savingforcollege.com/articles/college-savings-timeline-time-to-get-in-gear

In last week’s College Savings Timeline post, we discussed how its never too early for new parents to start saving for college. However, we understand that the early childhood years can be a crazy time and many parents don’t even start to think about college until their children enter grade school.

Not to worry! Even if your child has less than 18 years until college, you still have plenty of time to grow significant savings. It’s also the perfect time to start thinking about building a foundation for your child’s future resume. Once it’s time to apply for scholarships, you’ll want their application to stand out from the others.

Here are five things to focus on if college is 10 years away:

• Re-evaluate your savings strategy.

  If you started saving when your child was a baby, now may be a good time to give your account a check up. You may want to think about what’s happened in your life since then. Has your household income changed? Are there more children to save for now?

  The easiest way to re-evaluate your situation is to use a college savings calculator to determine how much you should be putting away to meet your goal. If you’ve had another baby, your goal should change to include the cost of each child’s tuition. If your household income has increased, can you afford higher monthly contributions?

• If you haven't already, open a 529 college savings account – today!

  A 529 plan is an investment account, which means that earnings will compound over time. In this particular type of account, these earnings will also grow tax-free. Because of this, there is a hefty price of procrastination and each day you wait to contribute to the account you are missing out.

  With today’s college inflation rate at 4%, in 10 years the average four-year public school is expected to cost over $145,000. If you start saving immediately, you will need to make monthly contributions of around $665 to cover the total costs (assuming a 6% annual return). However, if you wait just two years to start making contributions, that number jumps to $840. Because you missed out on tax-free earnings growth over the last two years, you would end up contributing a total of $7,000 more over the life of the plan.

• If you already have a 529 plan, it's time to adjust your allocations.

  Perhaps you’re using the age-based investment option offered by your 529 plan. Meaning, as college gets closer the account will automatically shift allocations toward more appropriate asset classes. Investors are often rewarded for taking risk, and so the more time you have, the more risk you should be willing to take on in hopes of a greater reward. If you opened your account when your child was an infant, you likely started out with an account that was heavily invested in stocks. As your child grows, the money will be shifted toward “safer” fixed-income investments.

  If your 529 plan does not offer age-based options, you can adjust the allocations manually yourself. However, you are only permitted to make investment changes to a 529 account twice per year. For a child that is around 10 years away from entering college, it’s a good idea to invest in a balanced portfolio slightly weighted more toward stock funds or Exchange Traded Funds (around (70%) over bond funds or money market funds.

• Develop good study habits early on.

  While colleges won’t necessarily look at elementary school grades, the skills your child develops now can set them up for success later on. Designate a consistent time and place for homework and stress the importance of grades. Some parents find that rewards for good grades can be effective, similar to incentives you receive in the career world. Other parents disagree and insist the motivation has to come from within. No matter what your strategy is, the important thing is to encourage your children to develop good habits and strive to achieve their best academically.

9 tips on getting your child into an Ivy League school

• Get your kids involved in unique activities.

  The time will soon come when you’ll be helping your child fill out scholarship applications. Today’s students need more than just good grades to differentiate themselves. This is a great time to start focusing on your child’s interests, whether it is sports or other extracurricular activities. When they find something they like, try to find organizations in your community where they can use their skills toward volunteer work. It’s also a good idea for them to get used to managing their own time at a young age so they are better prepared for high school. Getting your kids to be more efficient with their time will actually help reduce the potential for stress as they enter later grades.

See how one family used scholarships to bring down college costs.

Read the other posts in our College Savings Timeline series:

• New beginnings
• Now entering the world of high school
• The home stretch