There are a lot of factors that affect the amount you'll need to save for your child's education, learn how much you'll need for your child with Sootchy.
As one of the great expenses of a person’s life, college carries a price tag that few families can tackle without some form of financial planning or assistance, and that price is only growing as the years go by. Perhaps the most common strategy used to address this problem is saving money with financial tools like 529 plans; by setting aside some portion of their income on a regular basis, families can slowly build up the capital they’ll need to cover the cost of tuition. Although this practice is widespread, many parents and relatives find themselves wondering, “How much should you save each month for your child’s college?” To find out, keep reading as we answer this important question.
No matter your strategy, saving enough to cover your child’s tuition at college requires careful planning and, preferably, an early start. The type of account you use to save for college can have a huge impact on your final balance as well, though, so it’s worth looking at some of the top accounts people use to pay for their child’s college career. The following are some of the most popular options:
A traditional savings account is perhaps the most accessible option, since all you have to do to open the account is visit your local bank. As easy as they are to use, however, these accounts also have one major drawback: a very low rate of return. Many savings accounts come with interest rates of less than a tenth of a percent, so you won’t be able to earn much from your contributions each month.
While we’re on the topic of rates of return, investment accounts are used by some families to help save for college because they tend to provide a much better return on your savings, and there are many different plans to choose from. That said, the earnings from traditional investment accounts are taxed at both the state and federal levels, so it’s hard to hang onto what you earn over time.
Arguably the best option for college savings is the 529 plan, which is part savings account and part investment account. With a 529 plan, you can set aside money each month, which will then be invested in either a portfolio you’ve chosen (with an education savings plan or ABLE account) or one decided on by the plan administrator (with a prepaid tuition plan). Best of all, the earnings on the account are exempt from federal – and often state – taxes, so you can actually keep whatever the account generates as long as it’s spent on your child’s education.
The disparate financial situations of American families can make it tough to say exactly how much you should be setting aside each month for your child’s college fund, but there are a few guidelines that can help you figure out the best amount for your situation.
Firstly, keep in mind that you may not need to cover the entire cost of college for your child; federal financial aid, scholarships, and family contributions may be able to help you meet this need when the time comes. However, just to be on the safe side, let’s say you want to try and cover the total cost; what’s a good dollar amount to set aside each month?
With a 529 plan, your best bet will be to set aside as much as you can, especially early in the life of the plan. Because these accounts derive much of their value from the tax-free earnings they generate, and because these earnings require time to build, getting an early start on the account can mean much greater returns down the road. For the first year or two, try to contribute as much as you can afford – maybe a few hundred dollars each month, if you can spare it. After the plan has started to mature, you can throttle back a bit on your saving, but make sure to keep adding to the account on a regular basis.
Prepaid tuition plans simplify this issue by requiring a certain contribution each month, which can make it easier to ensure you’re meeting your savings goals. However, these plans are somewhat less flexible than education savings plans, which often allow you to give whatever amount you’d like on whatever schedule you’d like. A few plans do have minimum contributions, but these are usually much lower than the amount you’d want to save each month – somewhere around $25 or $50.
Also, if you’re trying to save each month for your child’s college costs, be aware that many 529 plans allow for automatic payroll contributions, and they may even come with one or two benefits if you opt for this route. By setting up these regular payments, you can save yourself the hassle of figuring out what amount to contribute or how often to set the funds aside.
Though there are a lot of different ways you can go about saving for college, 529 plans offer a number of benefits you won’t find with any other savings account – from state tax breaks for contributions to customizable investment portfolios and a federal tax exemption. Learn more about the benefits of 529 plans or get started with your plan today by downloading the free Sootchy app or visiting us online.