Planning for your kid’s college can be a daunting task, leading to an endless stream of questions you ask yourself: Will they go to a public or private school? Will we get financial aid? Do they want a post-college education? Will I have more kids? Are there better ways to save? Why does 529 keep coming up and what is it?
These questions are just the tip of the iceberg. The world of college planning is enough to make even the brightest financial minds spin in circles!
At Fig, we pride ourselves on breaking down complex issues like building credit into simple, real-talk guides that everyone can understand. My goal in this article is to give you a tangible one-size-fits-most approach that you can confidently use and adjust to fit your needs. This is Fig’s real-talk guide to college savings!
The One Size Fits Most Answer
Aim to save $200 a month (or $2,400 a year) in a 529 plan and you’ll have a sizable fund when your kid turns 18. To get a more exact number, I’ll use this example for the rest of the guide:
In this scenario, we’ll have $54,384.34 in their college fund when your kid turns 18. This is enough for most in-state schools and a great start for out-of-state or private schools. To recap, $200 a month starting at 2 years old gets us $54,000! For quick math, every $100 a month we save turns into $27,000 on college enrollment day. So if you save $300 a month, that gets you $81,000. You can use this general rule of thumb as a starting point and adjust your savings number up or down based on your situation.
How this Maximizes the Value of Your Savings
There are 2 key concepts to ensure we get the most bang for buck on our savings in the long run: compounding interest and 529 plans.
Compounding interest is the engine behind all long-term savings plans, from college to retirement. Simply put, this is interest you earned last year earning extra money for you this year.
As a quick example, if I have $100 and earn 5% interest, at the end of year one I’ll have $105, which is my interest of $5 (5% *100) + my original $100. At the end of year two, I will have $110.25, not $110, because of compounding. This is because my interest earnings in year 2 are $5.25 (5%*$105) + my original $105 at the start of year 2. My 5%in interest from year 1 earned me an extra quarter! Whileit’s only a quarter here, let’s see how big this gets. In our original example, I was saving $200 a month for 16 years, that’s $200 a month * 12 months a year * 16 years = $38,400. But I said the final number was $54,384… that’s the $16,000 power of compounding interest!
What you need to remember: compounding relies on time to get big, the earlier you save the more your money will multiply by the time you need it
529 plans are a specific way to get tax savings when you save for college. Unfortunately, these are often underused because they can get complicated due to slightly different state rules. However, I’ll cover the major things you need to know to use it effectively in any state.
The skinny: 529 plans in six sentences
What you need to remember: 529 lets you spend moneyin the future without paying taxes and can save you money today! Your state affects the extent of your 529 plan benefits.
Wrapping up: How to make this guide work for you
The easiest way to adapt this guide is to start by figuring out how much you want to save. Once you have an approximate number, you can work backwards and adjust the monthly amount to match your end target. Keep in mind that saving for college is just as much art as it is science, if you miss some months because of the unexpected but can make it up with tax refund dollars later that’s ok! The important thing is to start the habit and take advantage of 529 plans early. We have an opportunity to save and earn interest tax free! Now Google “529 plan Insert your State Here” and start building the savings habit today!
Zara is the Head of Partnerships and Strategy at Fig. Fig is a finance technology company that builds risk models and lending software for non-profit organizations. Fig started as a collaboration with the United Way to create responsible installment loan and credit builder loan programs for underbanked Americans. Prior to Fig, Zara was a part of Linklaters’ Investment Management Group.