Good things don't always come easy. Whether it's eating a nutritious diet (and skipping the tempting junk food), exercising regularly, or getting enough sleep, we're often not disciplined enough to make the wisest choices for our bodies. However, when we do make those smart decisions, we increase our chances of living a long and happy life.
The same principle of discipline applies to saving for a long-term financial goal. For many people, it's tough to save consistently for such a faraway objective. But, when an investor has the discipline to save regularly for the future, their chances of achieving long-term financial health increase dramatically.
A recent study by Vanguard analyzed over 100,000 529 accounts to learn how investors saved for higher education over the long term, and if their behavior resulted in any trends.1 The research uncovered several positive tendencies among the group, including their increased investments in 529 plans, their early start approach to saving for higher education, and their commitment to habitual saving.
This article will focus on one important aspect of that study: People who save more consistently are usually the most successful 529 plan investors.
College savers are investing more consistently
529 plan savers increasingly make automated contributions, which means their savings amounts are growing too. For example, more than 24% of account holders made automated contributions in 2015, compared to just 5% in 2004. And since 2003, the average initial contribution amount increased by 36%.
Automated contributions help investors stay financially disciplined through a consistent stream of saving. When we looked at three types of savers, broken down by contribution frequency, Vanguard’s study results show that saving consistently improves investor outcomes.
Let's look at the three main types of savers:
These clients didn’t contribute to their 529 plan beyond three years. Lapsed savers make up 15% of all account holders—only 7% of them made automated contributions when they started saving. Perhaps this type of investor initially had good intentions of saving consistently—but they were blown off course in the early stages of their investment journey.
This group contributed less often every year from when they first opened their 529 account—to year-end 2014 or the year their beneficiary turned 18, whichever occurred first. Inconsistent savers make up 40% of all account holders—32% of them made automated contributions when they began saving. Maybe this type of investor experienced a temporary setback like a job loss or a serious illness and didn't or couldn't get back to saving regularly because of a financial hardship. Or maybe inconsistent savers just forgot to put away a few dollars every year.
These 529 account owners contributed every year prior to 2015—or the year in which the beneficiary turned 18—whichever occurred first. Consistent savers make up 45% of all account holders, and an impressive 66% of them made automated contributions when they started saving. These savers are the equivalent to the healthy eater, who exercises regularly and gets plenty of sleep. They increase their chances for long-term success—physically and financially.
It's encouraging that many 529 account owners are saving consistently. Consistent savers make up the largest subgroup, followed by inconsistent savers, who missed at least one year of contributions. Lapsed savers, who haven't contributed beyond year three of their account being opened, make up only 15% of the research group.
Although lapsed savers and inconsistent savers had higher initial funding amounts, the consistent savers quickly caught up, and by year four they'd achieved better results than the other groups. As shown in Figure 1, we learned that:
- Lapsed savers had the lowest average 529 account lifetime savings—they contributed an average of $10,825 through year-end 2014.
- Inconsistent savers accumulated nearly double the amount of lapsed savers—they contributed an average of $19,745.
- Consistent savers—who used automated contributions more than any other group—saved the most. Their total contributions averaged $23,566.
Like any loving parent or guardian, you want to help provide your child with the best financial future possible. It's not always easy though—you have to keep up with the fast pace of higher education inflation, which has averaged 7.1% annually since 1997.2 Even though a plan of regular investment cannot ensure a profit or protect against a loss, this study should inspire 529 account owners, who can help offset higher education inflation by contributing consistently.
So whether it's nutrition or investing, discipline and consistency are the keys to a healthy body and a healthy bottom line.
1 Data for this analysis are based on a sample from the following Vanguard-client, direct-sold 529 plans: The Vanguard 529 College Savings Plan, CollegeInvest Direct Portfolio College Savings Plan (Colorado), College Savings Iowa, MOST—Missouri's 529 College Savings Plan, and New York's 529 College Savings Program Direct Plan. The total number of accounts in the sample was 108,957.
2 529 plan savers earn better grades for behavior, Vanguard 2017.