Calculating How Much To Save For College: Saving From Birth To The Teen Years

Beginning At Birth

Saving for future events in your child's life should begin no later than the day he or she is born, but you shouldn't be the only one putting money away for that purpose. Your child eventually can help fund his college accounts, too. Use the occasion of your child's birth to open up one or more college savings plans and an account in your child's name, into which you can deposit any gifts he or she receives at birth. You can add birthday gifts and other such sums to it regularly, until your child is old enough to begin making his or her own deposits. There's no better way to show your child the benefits of saving than to have a ready-made example with his or her name on it.

Putting small sums of money aside in your child's name (with you as custodian) is great, but you may want to consider depositing larger sums into an account in your name (perhaps as trustee for your child, but using your Social Security number to open the account) or even using that money to start a Section 529 plan for your child. Teaching your children about money is key if they're to become successful adults, but if your child will need any sort of need-based financial aid down the road, the value of the accounts held in his name will be counted more heavily than one in your name (20 percent for your child's account against a maximum of 5.64 percent for yours).

While your child is still young, you may want to consider investing in high-growth stocks, as opposed to bonds or even money market funds. True, the risk is higher than with other sorts of investments, and you may actually see the value of your investments drop. Time, though, is on your side; traditionally, money invested in the stock market has outperformed other investments, and if you have the time (usually anything longer than five years) and a stomach that can handle the risk, your investments will probably appreciate significantly.

Getting In Gear During The Teen Years

If you begin your child's college savings accounts at birth, by the time he or she is a teenager, you should have a tidy sum inside those accounts. Still, you're edging ever closer to that magic matriculation date, and some of your investments may not have been gold-plated. It's never too early to start saving, but it's also never too late: It's time to start superfunding your Section 529 plan, if you can.

Regarding the money you have managed to save, it doesn't matter if your investments have done spectacularly or have tanked: Now is the time to begin moving at least a portion of the value of your investments into less-volatile areas, such as bond and money market accounts. As each year passes, continue to decrease the amount you have invested in riskier stocks, and increase the amount you maintain in bonds, certificates of deposit, and money market funds. Although the potential for growth in these accounts is limited, so is the potential for loss, and at this stage, you want to know that the money you've saved is secure for your child's education.

If the writing is on the wall, and you're realizing that your child is going to need some amount of financial aid, this is also the time to start moving assets away from your child. If you have a Coverdell account for your child, you may want to convert it into a 529 plan at this point. If you choose this option, the original Coverdell beneficiary must also be the 529 designated beneficiary. If you decide not to roll over the Coverdell funds into a Section 529 plan, now would be the right time to use the money in the account to either buy a computer or pay for some extra tutoring. At this point, anything you can do to give your child an academic edge may pay off in the long run; many scholarships are awarded based on merit, rather than need, and money spent now in strengthening academics may pay you back many times over down the road.

Finding Out It's Never Too Late To Start Saving

Obviously, if you wait until one year before college to set up a college savings account, you probably won't have as much in it as parents who begin saving the day their child was born. You could let that knowledge defeat you: Why bother saving anything if it's too little, too late? But you can fight back.

Forget a Coverdell account at this point (unless you're able to roll over an existing Coverdell account from another child to this one). But a Section 529 plan is still the best bet. Many prepaid tuition plans will be closed to you (they require that you begin making contributions by the time your child reaches a certain grade, which you've probably already passed), but all of the savings plans are open, available, and just waiting for your money.

And, although putting money into a tax-deferred or exempt account six months before the first tuition payment is due may not make sense, remember that your child will be attending college for the long haul, and that money could earn a considerable amount inside that account before the last tuition payment is due. Consider making your first payments using current income, or Stafford or PLUS loans, and save money in your child's Section 529 plan for his later college, or even graduate-school, years.

No matter when you start, or how much you manage to accumulate, saving something is better than saving nothing. That something may mean the difference between your child being able to attend college or not, or being faced with massive debt or a smaller, more manageable amount.