Your Child Is: Newborn to Age 7
The challenge: You want to save for college right out of the gate (and, hey, good for you!), but you are not sure how to begin.
Your best savings plan: First things first: Before you put one red cent away for Stanford or State U, make sure that you have attended to more urgent money matters. You should have amassed at least three months’ worth of emergency savings (enough to cover your mortgage or rent, food, utilities, and transportation costs) and invested in your own retirement account, meaning you are saving enough in your 401(k) or 403(b) to earn the company’s match or are socking away at least 10 percent of your gross income (up to $5,000 a year) in an IRA. “You want to make sure you’ll have enough savings for retirement, so your child won’t have to worry about you and you won’t become a financial burden to her,” says Kristin Harad, a certified financial planner in San Francisco, who works mainly with families with young children.
Once your long-term finances are on track, the best place to start saving for college is a state-sponsored 529 plan, a type of investment fund that allows your earnings to grow, tax-free, as long as you ultimately apply the money toward higher-education costs. What’s more, your state may offer additional tax breaks, like a full or partial state-income-tax deduction on contributions. You can invest in any state’s plan; fees and plan specifics (such as investment options and additional benefits) vary greatly. To compare, go to savingforcollege.com. Worth mentioning: Be sure to open a 529 account naming you (not your child) as the owner to minimize the impact on her financial-aid eligibility and to make sure the funds are used “according to your intentions,” says Kalman Chany, a New York City–based college-financial-aid consultant and the author of Paying for College Without Going Broke ($20, amazon.com).
Of course, every parent wonders how much to save. And with years to go before college starts, there is really no way to know the amount that you will need. (How can you expect little Henry to root for the Yale Bulldogs or the Georgia Bulldogs when he is not even potty-trained?) However, you can get a rough idea of how much you should stash away annually by using the college-savings calculator at finra.org. When making your allocations, put around 80 percent of your portfolio in riskier investments, like stocks, since you have more than 10 years before you will need the money, says Harad. Then invest the remaining 20 percent in more conservative bonds.