3 simple ways to boost college savings by thousands of dollars
There are different degrees of saving.
The early bird gets the fatty college savings plan. Or so it seems from a recent survey of more than 1,750 parents from insurance company MassMutual.
Indeed, parents who start saving before their child’s first birthday parents saved 27% more ($28,000) than those who started saving when their child was between ages 1 and 10 and about 40% more than those who started after age 10.
Part of this is, of course, the magic of compounding. An example from New York’s 529 plan shows how this plays out: “Let’s say you set aside $1,200 a year—that’s just $100 a month—in a tax-deferred account such as a 529 college savings plan, for a total investment of $21,600 over 18 years. If this investment earns 5% a year, you’ll have about $35,400 at the end of 18 years.” But if, instead, you wait 9 years to start saving that amount each month, you’ll end up with just $13,900 — which means that “you’ll only have earned about $3,000 in that 9-year span—as opposed to nearly $14,000 over 18 years.” And it could also be that early savers are more diligent about regularly putting in money to their accounts.
Whatever the reasons, one thing is as true now as it’s ever been: Many parents aren’t saving for college because they think they can’t afford to. Just over half of families (57%) say they are saving for college, according to the latest data from Sallie Mae. What’s more, of those who are not saving, the majority say that’s because they can’t afford to save for college.
That’s a mistake you’ll want to avoid. The average cost of tuition and fees was $33,480 at private colleges, $9,650 for state residents at public colleges, and $24,930 for out-of-state residents attending public universities. What’s more, college costs are rising at roughly 5% per year. The good news: Most parents can save at least something for college, experts say. Here’s are three simple things you can do to boost your college savings by tens of thousands of dollars.
Rethink the cars you buy. “The average household spends over $9,500 per year on transportation, and about $4,000 worth of that is just on car purchases, which are depreciating assets,” says Lyn Alden, the founder of Lyn Alden Investment Strategy. Part of that is that “many people buy cars and SUVs that are too expensive for their income level, and replace them too frequently,” she says. If instead, families bought a more modest, used car, they could cut their auto spending.
That’s a strategy that Jeff Neal, dad to three kids, uses. “I personally drive a beater car. It’s a 1997 Mazda Protege. This car only cost $1500. So I don’t have any car payments. And I only pay for minimum coverage car insurance for this car.” Alden notes that these savings can add up: “If a household can save $1,500 on transportation costs per year, and invest that money into a diversified fund that grows at 6% per year for 18 years, they’ll have over $40,000 in inflation-adjusted extra money for paying their kids’ college by the time they graduate high school,” she explains.
Pay yourself first — and make it automatic. Have the money you earmark for college savings — even if it’s just $50 a month — automatically deducted from your bank account and put right into a 529 plan or another savings vehicle. And as you make more money, up this amount. The reason: “Our expenses tend to inflate as our income goes up,” says Alden. But if you have the money automatically put into savings, it’ll be there before you can spend it.
To make his savings automatic, Neal uses the app Acorns, which is linked to his debit card. “Whenever I use my debit card, this app rounds my purchase up to the nearest dollar amount. So If I spend $10,50, it’ll dump $0.50 into the account.” He invests that savings in low-cost mutual funds to help him save. “Pocket change isn’t going to help anyone right away. But my oldest kid is 4, so in 14 years, that should be a significant amount.”
Get a side hustle. “For families whose income is quite low, and there’s very little room in the budget to cut, then they can focus on boosting their income,” says Alden. “If a household can bring in just an extra $250/month in after-tax income from work on the side, ideally something they enjoy doing, and put all that money into a diversified investment account that grows at a 6% rate per year, they would have over $82,000 in inflation-adjusted money after 18 years.”
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