Next week will mark the first official days of fall, and while seasons change, I’m sorry to say that the high cost of college tuition is here to stay. In fact, for the 2019-2020 school year, Americans shelled out an average of $22,000 for public school tuition and a whopping $50,000 to attend a private university.
However, as college attendance remains a top priority for many teens and their families, we’re going to cover the most-asked college savings questions and what you should start doing today. Did I mention it’s National College Savings Month? 😉
When should I start saving for college?
The short answer: as early as you can. When it comes to saving up for hefty college tuition costs, time will be your greatest asset and new best friend. The sooner you start saving, the harder your money can work for you thanks to things like compound interest. It also means you’ll need less savings overall.
Need a refresher? Let’s say you put $1,000 in a savings account which has a 5% interest rate that compounds annually and you don’t make any additional contributions. At the end of the first year, you’ll already have $1,050, meaning you made $50 by simply letting your money sit. Over time, that number will only continue to grow. Check out this compound interest calculator and see what’s possible!
What type of savings account should I use?
Let me introduce you to the 529 college savings plan, a tax-advantaged investment account which allows you to save for future education costs.
Here’s how it works: This plan offers tax-free growth and withdrawals for higher education related expenses such as tuition, fees, books, room & board, etc. And, depending on how early you start saving for college, your contributions could be as little as a few hundred dollars a month since your money will continue to grow over time.
How much money should I be setting aside each month?
Great question. While there are a number of different ways to approach this, we recommend following these 3 steps:
Set a total college savings goal. Think about where you or your child might like to go to school, look at the current costs of tuition ($22,000 for public and $50,000 for private) and add ~5% to accommodate a possible rise in costs. If you’re not sure what college that might be, consider splitting the difference between the two types of schools (somewhere around $35,000-$40,000).
Determine your monthly contribution. With that goal in mind (i.e., $30,000 x 4 years = $120,000), figure out how many years you have to save up and do the math (i.e., $120,000 ÷ 10 years = $12,000 ). To get your monthly savings contribution, simply divide that number by 12 months (i.e., $12,000 ÷ 12 = $1,000). And remember, with things like compound interest, you don’t need to save that exact amount but it will serve as a good guiding principle.
Be realistic & optimize your savings. Perhaps you only have 4 years to save up for college tuition or the amount of money seems out of reach based on your current financial situation. As this is the case for many Americans, experts recommend following the one-third rule in which the total cost is divided evenly between: past income (what you already have saved), current income (what you’ll continue to earn) and future income (like a bonus or student loan you might take out).
What if I’m only just starting to save for college?
That’s okay, too! While you will benefit less from things like compound interest, there’s a number of other ways to help you come up with the cash. Beyond student loans, which not everyone is comfortable with, you can also consider the following:
Scholarships & grants. Many schools set aside extra funding that is awarded to students based on their financial needs, academic performance or athletic abilities. These awards can run anywhere from a few thousand dollars to a full ride (aka all of your college costs are covered).
Part-time jobs & side hustles. If you’re still coming up short, you could always consider taking on part-time work where you can make your own hours like driving for Uber, making deliveries for DoorDash or even exploring ways to monetize your hobbies (👋 Etsy and influencer partnerships).
At the end of the day, getting started is the most important thing. However, if you’re looking for additional ways to increase your savings, don’t forget to revisit your budget and identify everyday spending areas where you can cut costs.