5 Simple Ways to Start Saving for College

5-Simple-Ways-to-Start-Saving-for-College

Photo courtesy of Taber Andrew Bain

When people start having kids, one of the first money questions they often have is how to start saving for college.

It feels a little overwhelming, given all of the other things we have to budget for and all the talk about rising college costs. But it also feels important. After all, shouldn’t we be giving our kids every opportunity we can to chase their dreams? And isn’t having money available for college a big part of that?

Now, before going any further, I would really encourage you to read my post explaining why saving for college isn’t one of the top financial priorities for my wife and I. Unless you have unlimited income, you’re going to have to make some tough decisions when prioritizing how your money gets used, and there are some good arguments for putting college savings closer to the bottom of that list than the top.

You’re not a bad parent if you put other financial priorities before college. It might even make you a really good one.

But with that said, the question of saving for college comes up a lot, so today I’d like to give you a few simple ways to think about getting started.

Think about opening a 529 account

A 529 account is a lot like a Roth IRA, just for college instead of retirement.

Your contributions are made after-tax, meaning there’s no current tax deduction like there is when you contribute to your 401(k) or a Traditional IRA (with an exception for certain states). But once the money is in the account, it grows tax-free. And if that money is used for college expenses it also comes out of the account tax-free. Just like how a Roth IRA works for retirement.

There are a number of different things to consider when opening a 529 account, and I’ll cover them in more detail in a subsequent article. But here’s a quick-hit summary of my major opinions:

  • There are two basic kinds of 529 plans: a “savings” plan and a “prepaid” plan. In most cases, a “savings” plan is likely to be a better option simply because it’s more flexible. This isn’t a golden rule, but it’s a good guideline to start with.
  • While there isn’t a Federal income tax deduction for contributions, some states do offer a state income tax break IF you’re a resident of the state AND you participate in the state’s plan (here’s a good list). This is a good place to start your search for a plan.
  • If your state DOESN’T offer an income tax deduction, two states with plans I like are Nevada and Utah.

Or just open a regular old savings account

If you’re feeling confused or unsure about opening a 529 account but you want to get started saving right away, you can always just open up a regular old savings account and start putting money in there.

Remember that with any kind of investing, your contributions are much more important than your returns when you start out. So while a savings account probably isn’t the best long-term option (because of the tax benefits and potential returns of something like a 529), it’s a perfectly fine way to get started.

The nice thing about a savings account is that you know your money will be there and you’ll have full access to it whenever you want. So whenever you’re ready to make a longer-term decision, it will be easy to move the money wherever you want it to go.

Fund your accounts with gift money

With all of the other financial responsibilities you have as a parent, it can be tough to find room in the budget to for significant college savings. Trust me, I know. While my wife and I have been making small monthly contributions (see below), it’s not as much as we would like simply because we have to put other priorities first.

This is where gift money can be a huge help. If you’ve got a family like ours, your kids are probably going to start getting checks and cash for things like birthdays and holidays. You have a lot of choices for what to do with this money, but what we do is put it straight into the 529 accounts we have set up for them.

This can be a great way to turbocharge these savings accounts and give your kids a leg up on college without taking a bite out of your budget.

Set up a small monthly contribution

Let’s say you’re like my wife and I. You don’t really have room in your budget to save a lot for college, but you feel that emotional tug telling you that you need to be doing something.

Look, money’s a funny thing. There are times when you have to take the emotion out of your decisions and face the pure, unadulterated logic. But in the end, a good financial plan is one that helps you use your money in a way that makes you happy, and sometimes that will mean making decisions that are a little more emotional than logical (as long as it doesn’t cause any real harm).

For my wife and I, we should be putting all of our money available to invest into our retirement accounts. That would be the 100% logical thing to do.

But we do feel that small twinge telling us we should be saving for college too, so instead of completely suppressing it we allow ourselves the slight indulgence of a monthly $50 contribution. Is that $50 per month going to fund the full cost of college? Of course not. But it will provide something helpful. And it’s a small enough amount that it doesn’t detract in any significant way from our other goals.

The reality is that this kind of thinking is a little silly, but what can I say? It lets us save something for our kids education, it isn’t hurting us in any big way, and it makes us feel like better parents. For us, that’s an investment worth making.

What if you want to save the full amount? How much?

What if you’re already right on track with all of your other financial priorities and you have plenty of room in your budget to save as much as you want for college? How much should you be saving?

The honest answer is that it’s really hard to say. There are so many variables that are next to impossible to predict, like how much college costs will rise, what kind of college your child will want to go to, whether or not they’ll get scholarships, and on and on.

So I’ll be straight up with you. You’re not going to get a precise answer here. But you CAN get in the ballpark and at least start making some good progress.

If you Google “college savings calculator” you’ll find a lot of different calculators out there, each of which will use a different set of assumptions and get you a different answer. You might want to play around with a few of them and find the one that make the most sense to you.

But for what it’s worth, here are two I’ve found that I like. To me, they’re a reasonable combination of being easy to use and allowing you to change the variables to fit your situation:

Whichever calculator you end up using, remember that the number it spits out is just a rough guideline, not a golden rule. Use it as a way to help yourself get on the right track, but know that your plan will have to adapt as the years go on and you start getting a clearer picture of what college will look like for your kids.

Conclusions

Above all, I hope you keep these two things in mind:

  1. If you have limited funds, it can be a really GOOD decision to prioritize other things over college savings.
  2. BUT, if you’d like to save something for college, there are some simple ways to do it without taking too much away from those other goals.

Have you started saving for college? If so, how are you doing it?

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17 Comments... Read them below or add one of your own
  • Michael Solari April 17, 2014

    I like the Utah plan. Just set up an account for my brother this year. I feel strongly about expense ratios so having low cost in a 529 plan is important for me

  • Holly Johnson April 17, 2014

    We have our kid’s college savings in the Indiana 529 plan. Our state gives us a 20% tax credit on the first 5K we contribute in a given year, so it was a no-brainer.

  • Andrew April 17, 2014

    I opened a New York 529 plan and do get a tax deduction. The company that runs it is Vanguard so I’m happy about their low fees. What type of funds is the your 529 invested in? Currently I have it in the “moderate allocation” plan which is 75% stocks and 25% bonds…with 18 years, maybe I should be more aggressive but I read somewhere that age based 529 plans are sometimes too aggressive.

    • Matt @ momanddadmoney April 17, 2014

      The New York 529 is definitely a good one. We’ve got ours in the “Vanguard Moderate Age-Based Option:
      Growth Portfolio” for both our kids, the oldest of whom is 2. Currently it’s also 75-25, but it will switch to 50-50 when they turn 6, 25-75 at 11, and then 75% bonds 25% cash at 16. Seems pretty reasonable to me.

  • John S @ Frugal Rules April 17, 2014

    We have UGMAs for our kids that we’ve been putting some money in, but plan on opening 529s for them in the very near future. Putting a ton away for college is a little lower on our priority scale, but we do want to have something for them that will be helpful assuming they do decide to go to college. One stupid question, in relation to the state by state list, is that amount per child or is it per return? It looks like our state allows $5,000 per year, but wasn’t certain if that’s per child or just as a whole.

    • Matt @ momanddadmoney April 17, 2014

      That’s actually a great question, and it depends on the state. Some states have a max deduction per beneficiary, and some are by taxpayer. For Nebraska (which I believe is your home state), it looks like the deduction is per taxpayer: https://www.nest529direct.com/content/nestplan_taxadvantages.html.

      But the good news is that they’re upping the allowable deduction to $10,000 for 2014.

      • John S @ Frugal Rules April 17, 2014

        Awesome, thanks for clearing that up for me Matt! I should have known that, don’t know why I didn’t. Anyway, that sort of surprise me, in a good way, that they’re increasing it – Nebraska is horrid when it comes to tax benefits but I’ll gladly take what I can get.

  • Laurie @thefrugalfarmer April 19, 2014

    I’m a firm believer that every penny adds up. Even if you feel like you can’t save a lot, at least start somewhere if college savings is a priority for you. Something is better than nothing.

  • Done by Forty April 21, 2014

    Such a timely post, Matt, as my sister is looking to set up a 529 for her daughter. Thank you for the great summary and analysis! There are a ton of state options so I appreciate the advice to look at Nevada and Utah. Her state, CA, doesn’t seem to offer any tax benefits so she might as well go with a good plan.

    • Matt @ momanddadmoney April 21, 2014

      I was actually just looking at the CA plan the other day and I have to say that it looked pretty good. No real incentive one way or the other without the tax benefit, but CA still may be worth looking at.

  • JNEW April 21, 2014

    I have another suggestion. If you open your brokerage or 529 account with Fidelity– you can get a a “fidelity sponsored” credit card that, when you use it for every day expenses, deposits TWO PERCENT (2%) of the full amount spent on the card into your account. For every $1000 you spend– they put in $20 in your account. In one year that is $240 saved that you didn’t have to actually save.

    • Matt @ momanddadmoney April 21, 2014

      That’s a great suggestion! We actually have the 2% Fidelity card but it’s not linked to a 529 because we do that through Vanguard. Fidelity also has the option to link the cash back to an IRA, which is another great use of the money.

  • Lee @ BaldFinance.com May 30, 2014

    What we started doing this year for our 3 year old son’s birthday was asking for donations for a local charity and/or contributions to his 529 account instead of more toys. At first I thought there would be a lot of pushback, but we received so many positive responses from other parents that I think they are going to do the same thing for their kiddos.

    http://baldfinance.com/2014/03/please-no-gifts-for-my-3-year-old-do-this-instead/

    • Matt Becker June 3, 2014

      We like getting those 529 contributions as well. Less clutter in the house, and it’s definitely going to a good cause.

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