Dear Reader, The first thing you can do is to give yourself credit for starting to save so early. While saving for a child's college education is an enormous challenge, making it a priority when it's so far away can be the first big hurdle. So you're off to a good start.
As someone who believes in the power of tax-advantaged growth, I'd say having a 529 account is one of the best things you can do. Not only does your money grow tax-deferred, but withdrawals for qualified education expenses are also tax-free. Let's talk about ways to maximize these benefits before we get into other ways to save.
--For now, make sure you're investing aggressively enough
Most 529 plans offer a variety of investing options, from conservative (meaning bonds and other relatively safe investments) to aggressive (meaning the stock market). As a general guideline, the longer the time until college, the more aggressively you can invest, giving yourself more potential for growth. Of course, with that potential for growth comes more volatility, so you would have to be able to accept that risk and be willing to stay the course in spite of market ups and downs.
As college gets closer, it's appropriate to gradually shift your investments out of the stock market. Some 529 plans have an option that will do this automatically. But if not, it will be up to you to manage the investments over time.
Looking at numbers, let's say you save $5,000 a year toward college for the next 15 years. With an average 6 percent hypothetical annual return, you'd have about $125,000. If you could increase that savings to $10,000 a year, you'd have $250,000 -- enough to cover the projected cost of four years at an in-state public university in 15 years.
--Put your contributions on automatic
A 529 account is only as effective as the savings you put in it, so if you haven't already, set up automatic monthly contributions to the account. Choose the maximum amount you can comfortably handle and consider it one of your nondiscretionary expenses. If it comes out of your checking account automatically, you won't have to give it another thought. And should your income increase, think about increasing the monthly contribution.
--Direct gifts or unexpected money to the 529
When your daughter gets a monetary gift, put at least a part of it in her 529. In fact, you might suggest to family and friends that money towards college is the best gift of all.
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