Like many financial goals that are years away, saving for college is easy to ignore. Lots of people open 529 plan accounts intending to save regularly and save more over time. But for many, the years go by and the money goes to other priorities. Suddenly, when college is on the horizon, there's a lot less saved for higher-education expenses than expected.
Are your savings on track?
When you look at your 529 plan account balance, do you wonder if you're on track? The answer, of course, depends on many factors unique to your situation. How much money will you need? How often do you contribute, and how much? Do you plan to save at a higher rate in the future?
To help you get a sense of where your savings stand, Figure 1 shows the annual balance of a hypothetical 529 plan account from a child's birth until age 18. The account owner in this example has a savings goal of $60,000 to cover 30% of the total cost of a 4-year, in-state, public college, which is expected to be about $200,000 in 18 years (based on the current cost of about $90,000 and a 5% annual increase).*
The chart shows how the account owner achieves the goal by saving consistently over the years. To gauge your own progress, consider your savings goal, the amount you've saved so far, and your child's current age.
Figure 1. How to reach a savings goal
|Age of child||529 plan account balance|
*Estimates are based on the current annual cost of $20,090 for a 4-year, in-state, public college, and an annual cost increase of 5%.
This hypothetical illustration assumes monthly contributions for a period of 18 years and a 6% average annual return. It doesn't represent any particular investment nor does is account for inflation or any taxes or fees payable/due upon distribution. There may be other material difference between investment products that must be considered prior to investing.
Make sure you set a savings goal
Do you know how much you want to save for college, or are you simply saving what you can? The thought of saving enough to cover college expenses can be overwhelming. That's why it helps to set reasonable goals. Not everyone can save enough to cover 4 years of public school, let alone private school. But having a specific dollar amount you want to target will help you set yourself up to reach it.
For example, if your family decides they want to save $50,000 toward higher-education expenses, how much do you need to contribute to your 529 plan account? Figure 2 shows the potential growth of your savings over 18 years at monthly contribution amounts of $50, $100, and $130.
Figure 2. Save now, save regularly
If your goal is to save $50,000 toward college, here are some things to consider:
- You'll likely need to save at least $130 a month for 18 years.
- Your investment earnings could help you reach your goal.
- You should save whatever you can, even if it's less than $130 per month.
- Any amount you save is that much less your student will need to borrow.
This hypothetical illustration assumes monthly contributions for a period of 18 years and a 6% annual return. It doesn't represent any particular investment nor does is account for inflation or any taxes or fees payable/due upon distribution. There may be other material difference between investment products that must be considered prior to investing. Figures are rounded.
Want to do your own calculations?
If you want help determining college costs and savings goals that are more specific to your situation, there are online calculators that let you add dollar amounts and percentages to get estimates.
Try these college planning tools <https://personal.vanguard.com/us/whatweoffer/college/tools>
Whatever your specific situation, one thing is certain: Saving as much as you can as early as you can really makes a difference!
All investing is subject to risk, including the possible loss of the money you invest.