A college education undeniably brings significant value to a child's future prospects, but it also comes with a hefty price tag. Ensuring a child's journey into adulthood isn't debt-ridden necessitates considerable planning and sacrifice from many families.
According to Scott Bishop, Managing Director and Co-founder of Presidio Wealth Partners, the ideal starting point for college savings could be as low as $50 or $100 a month, increasing incrementally each year. The pivotal thing is to commence the process immediately after childbirth – this not only helps to save a substantial amount, but also maximizes the magic of compounding.
To effectively budget your college fund, it is important to list out the potential costs you’d potentially face – tuition fees, room and board, textbooks, and daily expenditure – and make allowances for inflation.
Finance management company, T.Rowe Price, has compiled an in-depth analysis of price fluctuations for various types of colleges in the year 2024 and projected corresponding expenses for the following 18 years, based on an annual inflation rate of 5%. This resource can be invaluable for estimating future expenditures and planning yearly savings.
T.Rowe Price suggests two distinct saving models – a regular monthly contribution or a 'ramp-up' strategy which gradually increases contributions annually. These calculations primarily entail covering 50% of college costs. Thus, if you aim to finance a higher percentage of the expenses, your savings need to be proportionately larger.
Financial planning doesn't merely focus on saving more; it's also critical to strategize about where these savings are deposited. To achieve a return rate of around 6% as assumed by T.Rowe Price, these savings need investments in promising assets like stock in the initial years, allowing time to recover in the event of a market slump. Another viable option is to invest in a 529 savings plan, where withdrawals for educational expenses are exempt from taxation.
Despite the apparent challenges, college savings can be successfully handled with prudent financial planning. T.Rowe Price’s study reveals that a four-year stay at an in-state public college, often the most affordable option, would be around $60,000 in 18 years. To fully cover these costs, an approximate yearly generation of $3,300 through savings and investments over these 18 years is essential.