Posted on: 26-01-2015 in Financial Planning
Raising a child is expensive. Although the costs are high at any age, college deserves special attention and proper planning.
When to start?
A common question asked by parents is when to start saving for college. If you already have a kid, the answer is usually “now”, unless there is a more urgent or more effective use of your money, such as paying off a loan. Even if you don’t have extra money to put away for your kid’s future at the moment, it is wise to at least sit down and figure out how you will be able to regularly save in the future (the options are typically cutting costs, increasing income or a combination of these two).
Unless your child is already approaching college age and knows which school he or she wants to attend, it is impossible to predict how much money you will need. Keep in mind that besides tuition fees it will also need to cover housing, transportation and other everyday expenses for several years of student life. The cost varies from city to city and even from student to student. Moreover, there is inflation, which is also unpredictable.
Do not let the uncertainty discourage you from saving. In the end, the amount you will have saved does not necessarily need to match the demands. If it’s insufficient, there are several ways how your kid can get the rest (student jobs and student loans being the typical solutions). If it’s more than is needed, it can help your kid start adult life after school, for example, contribute to a mortgage down payment.
That said, you or your financial advisor will be able to find at least a rough estimate of the typical college cost in your country and the necessary monthly amount to save. Don’t forget to account for interest and returns, which of course are very uncertain. You can model your savings under several different scenarios, e.g. negative (that assumes a recession and decline in stock prices), neutral (the most likely, “middle” outcome) and positive (that assumes higher appreciation of your funds).
Where to invest the money?
Neither you nor any expert can predict which investments will make the most money in the future, but you can tilt the odds in your favour by following basic investing rules. In general, in the long run, stocks have higher returns than bonds and savings accounts, but they are more volatile and unpredictable.
If your child is very young and there are more than 10 years left until the college funds will be needed, it is probably best to have most of your portfolio in stocks or equity funds. As the investment horizon becomes shorter, you can gradually reduce the share of stocks and increase the share of bond funds and savings accounts, which are less risky. Always make sure you understand how fees and taxes will affect your returns.
Once you know what kind of investment you are looking for, it is time to select a particular fund or account. As always with financial products, be aware of the potential conflict of interest. If you ask an advisor at your bank, the recommendation will almost certainly be a product of that bank (or its partner provider). Independent advisors are better, even when they may charge a fee for their consultation. In any case, you can find all the various investment alternatives online and compare fees, conditions and past performance record (which is not necessarily a reliable indication of future performance).