Saving for Education: Start Early, Save Strategically
School can cause anxiety – and not just for the students! As costs for education rise, parents today should start thinking about saving for college earlier than ever before. Planning and saving early can be a significant contributor to success.
Understanding the benefits of savings tools can help you strategize and reduce the amount of financial stress when your kids head off to college. Working with a trusted advisor who understands all your financial goals – not just for education – can help you put the pieces together.
Start With a Vision of What You Want to Achieve
The first step is to come up with a reasonable goal for family contributions. Does your family have a tradition at a specific school? Do you want to base your savings on the anticipated cost of a state school? What percent do you want to cover? Many advisors will suggest that students should contribute at least a portion to provide a sense of ownership. Answering questions like these will help you create a target to work towards. Advisors have tools to estimate costs. You don’t need to start from scratch.
Consider Education Savings as Part of Your Overall Plan
Education is just one of the financial needs of a modern family and saving for school should be placed in that larger context. Consider your savings for retirement, emergency savings, paying down debt, and day-to-day budget when you develop your education plan. Trying to save for an Ivy League school likely won’t make sense if your retirement is underfunded or you need to rack up personal debt to pay for school. An advisor can help you put things in perspective.
Know What A 529 Savings Account Can Provide
The 529 savings account is one of the most powerful tools to save for education. It allows families to set money aside for education tax-free and invest contributions so they can grow over time — like tax-deferred retirement plans. Also, withdrawals aren’t taxed if the money is used for qualified education expenses. This ability to grow contributions tax-free helps your money go further. Others can also contribute to helping a student reach their goal, and many states sponsor 529 college savings plans that make it easy to start saving.
Correcting 529 Account Myths and Misconceptions
Some people believe a 529 is limiting, but in fact, it’s been designed to be very flexible. It doesn’t need to be used at a four-year college – it can be used at trade schools, or even for qualified private high schools. You can also easily transfer funds to another family member if a student opts not to go to college. It can be used for a wide range of college expenses – not just tuition. State-sponsored programs generally don’t lock you into attending a school in that state. And you have flexibility in how it is invested, just like with retirement – you aren’t limited to specific investments. Talk to an advisor who knows 529s to learn the details.
Start Saving as Early as You Can for Maximum Benefit
Like all investments, a key component to successfully saving for education is time. The longer you save, the more you can spread out contributions and reduce the impact on your budget. Saving over a longer period of time also gives you more time to earn compound interest and provides greater flexibility to adapt if your situation changes. Even if you need to scale back on contributions later, if you start early, that seed continues to grow.
It can be tempting to delay saving for education when it feels so many years away. But even if you don’t contribute much early on, getting the pieces in place will pay dividends long term. Talk to an Alerus financial advisor to learn more about the programs available and start creating your education savings plan today.