Preparing for Your Children’s College Education
You should have money set aside for emergencies, because as your children get older and you establish your home, the unexpected expenses will come more frequently. If you don’t have emergency funds set aside, those expenses can cause major stress in your marriage.
You also want to continue funding retirement and savings plans. This is the ideal time of life to begin setting aside money for your children’s college education. For example, if at a child’s birth you started depositing $100 per month in a savings account for his or her education, you would have deposited $21,600 by the time the child turns eighteen. However, through the magic of compounding, if that money had earned an average of 12 percent per year (which is not unrealistic), you would have accumulated $75,786 toward that college education (before taxes). That would pay for four years at almost any college in America today. (It may not in eighteen years, but it would today.) If you made a one-time deposit of $5,000 at birth and it grew at 12 percent compounded annually, the fund would be worth $42,893 (before taxes) at the end of eighteen years.
There are many ways to save regularly for college education. Mutual funds offer investment programs in which your bank account can be drafted each month for a certain amount - as low as $50, depending on the fund. If you start early and have an eighteen-year perspective, you’ll be able to weather the ups and downs of market cycles, and many funds have exceeded 12 percent annual return over a long time period.
Company savings plans and whole life insurance policies bought for the child at birth can also be good alternatives for college savings. The real issue is not so much the investment vehicle as it is the discipline of saving. You won’t give up today’s desires for future benefits unless you have a long-term perspective.
By making these recommendations, we’re not saying that every child has to go to college or that you should pay for 100 percent of your children’s college education. What we are saying is that if you want your children to go to college and you want to pay for that, starting early is the easiest way to do it. Waiting until kids are college age is extremely difficult.
The above advice steps from great experience of families all over the country. There are hundreds of thousands of couples who have put four and even five or more of their children through college by properly planning. To wait until your children are in college to begin saving for that education might ease financial pressures in the short term, but it will definitely compound the pressure in the long term.