The cost of a college education has been increasing every year. Learn ways to budget for your children’s college education and the reasons why you should start today.
If you have toddlers at home like me, the thought of sending them to college may get you all teary-eyed and emotional. As you know, time passes by way too fast! One day they need our help to walk, and the next day they are running away from us.
College may be far away for your little ones, but it doesn’t mean we shouldn’t be thinking about how to budget for college. The last thing we want is for money to be an issue when deciding on where to send our kids for higher education. We need to start thinking about how to pay for college NOW.
This is a guest post by Andrew Rombach, a Content Associate for Lendedu – a website that helps consumers, parents, and college students with their finances.
Today, many parents may cringe at the idea of paying for a child’s college education. College costs have more than doubled in the last 40 years. Whether you’re a parent who went to college ten years ago or 30 years ago, the point stands: college is more expensive today – and getting pricier by the year.
As you are already juggling the numerous obligations of parenthood, saving for college may seem like a laughable prospect. Despite this, it is an extremely important task that deserves your attention today.
Much like retirement, the earlier you save for kid’s education, the better off you’ll be when the time comes to shell out the cash – especially when you consider how college costs are rising. That money won’t save itself, and the first step to saving for college is setting up a budget.
Establishing a Budget
The first step to saving for college is establishing your budget. A budget is a powerful tool, especially if you’re taking care of children. As a general rule of thumb, all budgeting takes is a looking at your expenses and income and making decisions where to (and not to) spend your money. It sounds easy, but it can be challenging when the essentials outweighs your income.
Here are a few simple budgeting methods to get started.
Try Out the Envelope Budgeting System
The envelope budgeting system is cash-driven budget method. Every month, you should tally up your day-to-day expenses such as groceries, gas, transportation, and more. When you figure out what this monthly sum is, withdraw cash from your bank account and stick it in an envelope. Whenever you need to purchase groceries or other essentials, you can only use the cash in the envelope. All other income that month should go right to savings.
This method keeps you from habitually dipping into your checking and savings account. By establishing a spending limit and securing it with cash, you can cut out certain impulse buys and extraneous spending. This will leave room for you to put more money away.
The envelope budgeting system might be tough to stick to considering the demanding budget of parenthood, but pulling it off can work wonders for you monthly savings.
Consider Starting with the 52-Week Savings Challenge
If the envelope system sounds like a hard place to start, then the 52-Week Savings Challenge is a great way to save money for beginners. This challenges takes place over a whole year, and it requires you to save minimal amounts of money initially. Over time, you ramp up your weekly savings.
So, how much do you save in week 1? Put just $1 in the bank! By the second week, you need to put $2 in the bank. Rinse and repeat. In week 3, you save $3. Continue this trend throughout the year, and you’ll put away $52 by the last week. Sounds pretty easy, right? After 52 weeks, you will have saved a substantial amount of money. In fact, you will save $1,378 by the end. That’s quite a bit of money considering you started with just one dollar.
Furthermore, you can add to the challenge and try saving more. In the second year, start with $2 in the first week, $4 in the second week, etc. In the last week, you’ll save $104 for an annual savings of $2,756. This is a perfect way to save money with a demanding budget because it eases you into the habit of saving money every week. If you can start early on in parenthood, you have the chance to save way more money by the time you child turns 18.
How to Take Budgeting to the Next Level
Budgeting is a crucial step to saving money for a college education, but there’s more to be done with your money. So, what’s next? Now, it’s time to make your savings work for you. There are both tax-advantaged and interest-yielding accounts that can grow your savings over time. Two options are high-interest bank accounts and 529 college savings plans.
High Interest Bank Accounts
High-interest savings accounts are similar to traditional savings accounts, but they offer higher annual percentage yields (APY) than traditional accounts. APY is the rate of return on the money you have in an account. In short, bank will invest your money for you and offer yields on the investment returns. These accounts are relatively flexible, so you have the option to move your money between different accounts in search of better yield.
520 College Savings Plans
529 college investment plans are a special type of account sponsored by 34 states and educational institutions. Through 529 plans, parents can schedule monthly contributions from their paychecks. They are a simple, effective way of putting aside money for college.
Additionally, they offer tax advantages on contributions in some states. Furthermore, the money from these accounts can only be withdrawn for qualified educational expenses, so it will sit untouched until it’s time to pay for tuition, fees, or room and board.
These savings tips are most effective when utilized early. Parents should start saving as soon as possible. For example, a high-interest savings account can grow significantly more over 18 years as opposed to 5 or 10 years.
Why You Should Do It Now
As mentioned, you should start saving for college as early as possible. It’s definitely a good idea because you’ll save more money, but there are other reasons aside from savvy finance.
Today, over 40 million Americans have student loan debt, averaging almost $28,000 a piece. Furthermore, that’s the debt burden today; keep in mind that the cost of college is rising. Without any savings, your child could be shouldering that burden right out of graduation.
Student loans are especially problematic for young professionals and their futures. Student loans reportedly delay major life milestones such as starting a new family, getting married, buying a new home, or all of the above.
On top of this, your child’s credit is at risk. The national default rate is hovering around 11% and failing to pay back student loans could hurt your credit.
Your children aren’t the only ones at risk either. At times, college students are forced to rely on private student loans to cover gaps in financial aid and tuition, yet many do not have the credit history to qualify for a loan from a private lender. If this is your kid, then you may end up cosigning this student loan. When that happens, you put your own credit profile and finances at risk. If your student defaults on their private student loan, then you may find yourself footing the bill and taking a credit score hit.
These are just a couple of problems, but they stress the fact that saving now will help your child later – as well as yourself.
Finally, it cannot be stressed enough how important it is to start early. If your son or daughter is still young, then you are in a good position to maximize the your savings potential. Take advantage of compound interest early! If you put the budgeting work in, then make sure you put the savings to work for you and your children.
Have you starting saving for college yet?