Although it might seem like you have ample time between taking photos at kindergarten graduation and celebrating a college acceptance, saving money for education is much like childhood itself: every moment counts.
The simple fact behind putting money away for college is that the earlier you start, the more you’ll end up with, and not just because of the amount that you put in initially. The process of compounding means that your invested money will generate earnings, and the more you have in an account, the greater the compounding will be.
That means getting a true jumpstart—maybe even before your child learns to walk, nearly two decades before choosing a major—can make a big difference when that tuition bill finally rolls around.
Making your money grow
It's estimated that kids born in 2018 who go to an in-state public university looking for a four-year degree will require more than $150,000 for their education. But with an early start to your savings, the effect of compounding means you don’t have to save up that full $150,000 to have ready when the time comes.
For example: If you invest $200 monthly, starting when your child is born (figuring on 5 percent yearly interest), you would have almost half of that $150,000. Your own contributions would total $43,450 and you would earn just over $26,000 on those funds, for a total of almost $70,000.
As your savings increases, the amount you earn on that money also compounds, so you end up “making” more in earnings as your child hits the teen years.
But what about if you decided to wait until kindergarten? Although it’s only a five-year difference, it’s significant once tuition payment time arrives. In that scenario, your $200 per month from age 5 to 18 would result in $31,450 in your own payments and just about $12,600 in earnings, totaling just over $44,000.
That means a five-year wait would result in $26,000 less than if you’d started during infancy. That’s like walking away from free money.
Never too late
Although there are clear benefits of starting a college savings strategy early, that’s not always possible for everyone—sometimes, shifting life situations can take precedence over tucking money away for education.
But even when that’s the case, there’s value in starting whenever you are able, even when your kid is already a teenager and nearing college. Your money won’t compound as much, but it may save you money you have to request in loans.
Also, there are savings programs, such as 529 plans, that offer tax benefits you won’t get with regular savings accounts. For example you put after-tax money in a 529 plan, but the earnings on your investment aren’t subject to additional tax. Also, when you withdraw the money, you don’t pay federal taxes as long as those funds are used for educational expenses.
Student loans are often considered an investment because they help many young people secure a career, and an income, that they wouldn’t be able to obtain otherwise. But college debt can sometimes feel like an overwhelming burden, especially to someone just starting a career track.
Savings that start early and have time to grow through compounded earnings can help ease that pressure, and make college a true springboard for the future.
