College Planning start early

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College Planning - Start Early

The time of year is once again upon us when newly graduated high school students are starting college for the first time. It’s an exciting time, as new friends, intellectual challenges and independence lie ahead. But for parents who pay the bills for higher education, it can also be an anxious time.

According to a study by Sallie Mae, the nation’s largest source of funds for higher education, parents saving for their children’s college had saved less than half of what will be needed to cover the expected expenses. One in five hadn’t saved anything at all.

Fortunately, you can go a long way to avoid this headache by getting an early start in saving for college. It’s simply a matter of doing some planning, estimating costs and investing diligently.

Understand that it’s going to be somewhat difficult to plan with a large degree of certainty, due to variables such as tax laws, interest rates and spikes in college tuition that are bound to change over time. College costs have increased far faster than the overall inflation rate. The key is to do your best with what you know, and try not to worry about the rest. There are, however, some key points to consider before getting started.

Consider ownership. Do you want to create an account that will give your child ownership of any money, or would you rather retain control? There are tradeoffs to this decision, including tax issues that should be discussed with a professional.

Decide on your risk tolerance. We can help you develop a portfolio that reflects both your tolerance for risk and the time remaining until you need the money. By and large, we believe that earlier in the portfolio’s life you can be more aggressive with the investments you choose, with a majority of money in equities. The closer the child gets to college age, money is usually shifted into an investment that is less exposed to market risk.

Decide what college will cost. This will be a tough decision, since the cost of college depends on so many variables. In state versus out-of-state and public versus private are just a few of the choices that will be made. Costs of living can also vary from school to school. We have computer software updated annually with each college in the US including the costs of books, tuition room and board for both in and out of state pricing levels.

Once you sort these choices out, you’re ready to start saving. And the earlier, the better! For example, suppose that you’ve determined you’ll need $50,000 for your child’s college expenses at age 18. Starting at your child’s birth, you decide to invest monthly in an account that you expect will pay 10 percent interest. You’ll end up contributing $84 per month, and when you reach the $50,000 mark, you’ll have put in $18,144 yourself. The rest, of course, will have come from the power of compounding interest.

On the other hand, let’s look at what happens if you wait until age 10. You’ll need to save $343 per month to reach $50,000, and you’ll have contributed $32,928. As you can see, just by starting ten years earlier, you’ll keep an extra $14,784. Keep in mind these examples do not reflect the impact of taxes. College is a wonderful time, a bridge of self-discovery between adolescence and young adulthood. By saving early, you can guarantee that you’ll be just as excited about college as your child is.

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