The average cost of tuition has increased 40% since the financial crisis in 2008. Whilst it has been almost ten years since the financial crisis, parents are still feeling the effects today. Interest rates are at unprecedently low levels and saving for your child's tuition fees is becoming more difficult. Whilst interest-free and state sponsored loans are on the rise so are tuition fees and global levels of student debt
Read on to find out some great tips to help you save for your child's college education.
When to start saving and the power of compounding interest:
It is never too early to start saving for your child's tuition fees. Even if you have limited ability to contribute to a savings account - credit unions are one way to save small amounts with low fees and low opening minimums. An amount as small as $100 saved monthly for a period of 18 years at a 5% annualized rate will grow to $35000 - significantly helping to reduce the financial strain when they start higher levels of education. Even if your child still needs a student loan they will be significantly better off.
It is easy to show that when you start saving can be more important than how much you save. Looking at the table belowboth investments have a total investment of $21600 over their life span and are compounded annually at 5%. However, the blue bars represent a $1200 annual saving over 18 years and the orange $2160 over a ten years starting 8 years after the first investment.
as you can see the effect of compounding means that despite both adding $21600 to the account the 18 year period means that you will end up with $35000 instead of $32000.
Understand the importance of your retirement:
Whilst it is important to save for your child's tuition fees. It is also important to note that your retirement must not be overlooked. Saving by means of a pension scheme is very important - your retirement maybe upwards of 30 years with no income from work. Your child's tuition will only last 4 years and hence while contributions can be made they should take place after contributions to your pension.
Where you should put the savings:
The risks of Banks and the financial markets have been highlighted in the recent crisis. Whilst we will not make any recommendations as to where you place the money - be sure to look into the many funds and risks that they may entail before making your choice.
Look into the tax laws and codes.
Children in your country may not be subject to the same tax as adults. Hence It is possible in some countries to save on behalf of your child via trusts and other programs set up by your government. In this way, it might be possible to maximize the returns of your investment and decrease the strain on your coffers once your child begins their higher education.
Finally the key to any investment is thorough research, however understand that thorough research does not guarantee positive returns. As shown above, it is important to start saving right away even if it is only a very small amount.