Saving For College, $1 at a Time

It is hard to believe that that young child who barely knows her alphabet will be leaving the nest and heading off to college in no time at all. One of the biggest concerns that many parents have nowadays is how they will pay for college. It’s no secret that even public colleges are raising their tuition prices at record rates. Combined with decreasing amounts of financial aid available to many students it becomes critical to begin college planning early for most families.

So how do you start preparing? Well what if I was to tell you that if you have a very young child that you can start saving for college by putting aside just $1 a day. While it may seem impossible, we are going to use the same principal that we use for saving for retirement – only instead we are going to save for college. By using the power of compounding interest we will turn those dollar bills into hundreds.

So how do you take that dollar bill and put it to use? By building a portfolio of investments that will pay off up until your child is ready for college. The best way to do this is by making sure that portfolio is heavily vested in stocks. The younger the child, the more aggressive you should be. As he or she nears college-age you can start shifting those investments to more stable funds. But while they are young take that dollar bill and make it work, work, work!

Also investigate 529 Savings plans offered in many states. These plans are similar to 401k accounts in that they let you invest dollars before taxes. Plus, when you go to withdraw the money for college it is free of federal taxes. These plans are a great investment tool for making sure that your money goes towards college costs and not towards Uncle Sam’s tax coffers.

Ok, by now you may be a bit leery of how a dollar a day can save enough for college. So let’s go over two things: First, you don’t need to save for the entire 4 years of college. Chances are your child will qualify for a grant or other financial aid opportunity. Furthermore, they may also be the recipient of scholarships and other awards. Second, just like anything else every dollar you can put away early will grow over time. Let’s take a look at an example to bring this home.

If you can manage to set aside $30 a month from the day your child is born ($1 a day), by the time they turn 18 and are ready for college you will have amassed a portfolio of over $25,000 assuming a rate of return of 7%. Just imagine then what $2 a day could do!

College doesn’t have to be a financial burden for parents, and by preparing early enough you can make sure that you are not caught in a bind when that time comes. Take that dollar bill out of your wallet today and use it to build a future for your child tomorrow.

You may also be interested in the our article: Compare College Savings Plans