It's never too early for a college fund

The earlier you start saving for your child's education, the less you'll have to set aside each month.

Brittany Lynne
Hamm argues that the earlier you start a college fund, the less of a financial drain it will be. Image courtesy of Brittany Lynne Photography.

Let’s say you have a child today. You’re estimating that their college education will cost $25K a year, so that child is going to need $100K in eighteen years in order to pay for college. Let’s also say you can earn a steady 6% return on that money you save.

If you wait until the child is ten years old to start paying for college, you’re going to have to save $917 a month to reach that goal.

If you wait until the child is five years old, you’re going to have to save $442 a month to reach that goal. That’s a lot cheaper.

If you start when the child is born, you only have to save $271 a month. In fact, if you start as soon as you discover the pregnancy by starting a college savings plan for yourself and transferring it to your child, you only have to save $250 a month.

For a lot of people, $917 a month is either impossible or seriously challenging, while $250 a month is well within reason. That’s the difference between starting now and starting later.

Obviously, this same phenomenon works for any long-term goal you’re saving for. The longer you devote to saving, the less you have to save out of your own pocket overall (because interest is doing more of the work for you) and the less you have to save per month as well. A long-term approach turns something that seems impossible into something that seems quite doable.

The question really isn’t whether or not you should start saving right now. You should. The only real question is what your college savings goal is.

For example, if you intend to only save enough for a few semesters of textbooks – say, $2,000 – you’re still better off starting your savings at birth than waiting until the child is 18. At age 18, you’ll have to come up with the $2,000 out of pocket. If you start saving when the child is a newborn, you only need to save $5.50 a month.

In that $5.50 a month example, you’re actually only saving $1,188 out of your own pocket. The other $812 comes to you in the form of interest, which is the real reward for saving over such a long period of time.

The sooner you start saving for any goal, the more time you give for interest and growth on your investment to help you.

If you have children, right now is the time to start saving for their future education, even if it’s just $5 a month. Put it in a savings account for starters, but eventually you should look into a 529 college savings plan for your child.

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.

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