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

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Saving money for college, beginning the instant you know you have a child on the way, is certainly the most effective approach. However, if you couldn't or didn't save money for your child's education back then, you may be behind in the savings game.

But it's never too late to begin saving for your child's education. In the following sections, I discuss the best ways to start saving today for your children's education, regardless of their age.

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.