Q: We know we need to begin saving for our child’s college education. How do we begin building a college fund?
A: Regardless of your child's age, you should invest a regular amount on a monthly basis, boosting your college savings with the proceeds of bonuses, tax refunds, gifts, and inheritances along the way. While your savings plan should stay intact, you will need to adjust your focus as your child approaches college age.
New Born to 5 Years
With this much time before your child starts college, you may be in a position to accept a higher level of risk and invest more aggressively. Depending upon your tolerance for risk, you might invest most of your college savings dollars in stocks or stock mutual funds. The stock market invariably has its ups and downs but, over the long term, stocks consistently have outperformed other investments.
Ages 6 To 9
If your child is in now in elementary school and you are just starting to invest, you may not want to take the most aggressive approach. With a decade to go before your child reaches college age, you might choose to moderate your risk somewhat by investing assets into less aggressive growth-and-income funds. If you've been saving regularly and already have a growing college fund, you should stay the course.
Ages 10 To 13
You should continue to fund the college savings plan, but you might rebalance your portfolio toward a more conservative profile. You can accomplish this by directing more of your new contributions to bond funds or equity-income funds that, because they look for stocks that pay high dividends, tend to ride market dips better. Start researching safer, less volatile investments where you can begin shifting your money over the next few years.
Fewer than five years to go
You should start taking steps to preserve the returns earned thus far. You will want some growth to help keep your portfolio ahead of inflation but, overall, your emphasis should be on capital conservation and income. By putting a plan in place for selling your stock holdings and buying less volatile investments, such as bonds, CDs, money market accounts, and Series EE Savings Bonds, you won't be faced with the need to sell in a down market to meet an impending college bill.
Two years to go
Consider your eligibility for financial aid. If it looks like you won't qualify for financial aid, consider federal and state loan programs that are not need-based. Many colleges offer tuition installment plans that spread out payments and may make it easier if you need to pay part of your child's tuition expenses out of current income.
Count on Your CPA
As you start your adult financial life, it’s a good idea to get to know your local CPA. He or she can help you understand your choices and make the best decisions for your financial future. You may contact me at (409) 892-0233 or (409) 883-5306. My email address is brad@ekc-cpa.com.
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- Newborn to 5 Years
- Ages 6 to 9
- Ages 10 to 13
- Fewer than Five Years to Go
- Two Years to Go
- Count on Your CPA
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