Today they're learning to walk or tie their own shoes, tomorrow they'll be tackling calculus or coding in college. That's why starting to save for your children's education early can be so important—time will pass all too quickly.
Of course, nailing down a college savings goal can be challenging—education costs have been increasing at a rapid clip and the school and field of study your child chooses can ultimately impact the cost as well. Not to mention potential scholarships and financial aid.
You probably have a general idea of how much you'd like to save, but are your savings on track to get there? Don't worry: Once you've estimated how much you'll need to save, all it takes is a little math to figure out exactly what it will take to hit the mark. Here's how you do it.
Need some direction?
Here's a quick way to find out where you stand. Answer these three questions:
- What is your college savings goal—either monthly or in total?
- How many years remain until your child enters college?
- What annual rate of return are you aiming for on your investments?
Then use this calculator to see if you're saving enough based on your personal situation. You can also use it to explore your options and try out different scenarios. You can even see how your monthly savings can grow year after year, and get an idea of how fast your investment returns may add up.
Simply enter your answers in the relevant sections. First, provide your monthly or yearly savings goal, followed by the number of years available for savings to grow, and then your estimate of an annual investment return. With regard to an annual investment return, the calculator uses hypothetical percentages ranging from 4% to 8%. Keep in mind that investing involves risk; the value of your investment will fluctuate over time and you may gain or lose money. More aggressive asset allocations have the potential for higher returns but may be riskier, while more conservatively allocated portfolios tend to fluctuate less in value. Learn more about investing options for college.
The calculator can also show results for two different scenarios to help you explore your options. For example, change the number of years you plan to contribute or increase your monthly contribution amount—whichever works best for you.
Starting early makes a difference
Starting early will make a difference, but it may surprise you to see how much. Consider what happens as you adjust your time frame in the calculator:*
- If you start saving at the birth of your child, at an estimated rate of return of 6%, you'll have to save only a little more than 50% of what you'll actually need. Investment earnings on your contributions make up the remaining 50%.
- However, if you start saving when your child turns five, you'll have to contribute about 66% of the amount required, and investment earnings will make up only about 34%.
- If you start saving when your child turns 15, you'll have to contribute about 92% of your savings, because your investments will have only three years to grow.
Let's look at three different scenarios.
#1: Start saving at kindergarten age.
Erika is five years old and has just entered kindergarten. Her family recently decided to start saving for her college education by contributing to a 529 college savings plan. Her father wants her to go to his alma mater, a private school, so he has set a goal of saving approximately $75,000 by the time Erika is ready to enter college. The family knows they'll have to make a few sacrifices, but education is important to them so they don't mind.
They plan to contribute $300 a month, that's $3,600 a year. After 13 years, their contributions will amount to $46,800. This is far less than the family's goal and won't be nearly enough to pay Erika's college costs. Fortunately, their investments will have years to grow. Erika's parents are investing with an aim to achieve about a 6% annual rate of return, which can potentially result in an additional $23,834 by the time Erika graduates from high school, for a total of $70,634.
#2: Start saving at birth.
Meet Andrew, a newborn whose parents have already opened a 529 college savings account for him. Just like Erika's parents, they plan to contribute $300 every month, which amounts to $3,600 every year. The difference is that they have 18 years to save instead of only 13. The total amount contributed to the account by the time Andrew graduates from high school would be $64,800.
Andrew's parents, like Erika's, plan to invest with an aim to achieve about a 6% annual rate of return. But they have 18 years for their savings to grow, so their investment return, using their assumption, would total about $51,406. When added to their contribution amount of $64,800, this results in a potential savings total of approximately $116,206 by the time Andrew goes to college. See the difference five years can make?
#3: Start saving $50 more.
Now let's suppose Andrew's family decides to save just $50 more every month. Use the calculator to see just how much that extra $50 will potentially grow by the time Andrew enters college at age 18.
If the family saved $350 a month instead of $300, this would add up to $4,200 a year. Over 18 years, they'd contribute $75,600. Assuming the same 6% rate of return, they'd earn $59,974 in interest over 18 years. So their combined contributions and earned interest would amount to about $135,574. That would give Andrew an additional $19,368 when he enters college. However, these goals may not be met if the rate of return is less than 6%.
Put time on your side
As you can see, the amount you save and how early you start saving are two critically important factors in hitting your savings goal.
Start saving as early as possible by putting aside a set amount every month, no matter how little. It makes a bigger difference than you might think. That's because you're leveraging the potential power of compounding. Every year makes a difference—and time makes the biggest difference of all.