How to save for your child's college
For your child's college, your best ally is not earning more. It is starting sooner.
In short
To save for college, estimate what the degree would cost today, decide how much of it you want to cover, divide by the months left and invest that amount monthly, typically in a 529 plan, where growth is tax-free for qualified education costs. Time does most of the work: 200 dollars a month for eighteen years at 6% a year grows to about 77,500 dollars, of which 43,200 is what you put in.
College feels far away when your child is three, which is exactly why it is the best time to start: every year you wait, the monthly amount goes up.
How much you need
- Estimate the cost of the degree today: tuition for every year, fees, books and, if needed, room and board.
- Decide what share you want to cover. It does not have to be all of it; scholarships, aid and your child's own work can cover part.
- Divide by the months left. That is your minimum monthly contribution, before any growth.
In-state public universities cost far less than private ones, and savings can then cover housing, books and transportation.
Why starting early matters
Example: 200 dollars a month at 6% a year:
77,471 dollars
After 18 years
You put in 43,200
43,200 dollars
What you contributed
The rest is growth
Start ten years later and you would need to put in much more every month to get there. That is compound interest working for you: compound interest.
Where to keep it
- A 529 plan. Offered by states, it grows tax-free and withdrawals are tax-free for qualified education expenses. Many states add a deduction on contributions.
- Not cash in a checking account: over eighteen years, inflation eats a large part of it.
- More conservative as the date approaches: in the last few years, move toward stable investments so a downturn does not hit right when tuition is due. Many 529s offer age-based portfolios that do this for you.
Common mistakes
- Waiting to "earn more" before starting.
- Saving for college before your own retirement. Your child can borrow for college; you cannot borrow for retirement: how to save for retirement.
- Saving for college without an emergency fund. The first surprise will empty the college fund.
How it looks in the app
In Caudal you create a goal with the amount and the year your child would start college. The app works out the monthly contribution to get there on time and shows your progress year by year. If you also want to teach them to save: how to teach kids to save money.
Common questions
- How much should I save each month for my child's college?
- Estimate the cost of the degree today, decide what share to cover and divide by the months left. With growth the monthly amount drops; 200 dollars a month for eighteen years at 6% grows to about 77,500 dollars.
- What is a 529 plan?
- A state-sponsored education savings account. Money grows tax-free, and withdrawals for qualified education expenses such as tuition, fees and books are tax-free too.
- When should I start saving for college?
- As early as you can. The more years compound interest has, the less you need to contribute each month.
Try it on your own money
Caudal is an expense tracker in Spanish, English and Russian. Several currencies, goals, debts, a shared household budget. Recording an expense takes three seconds.
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