As parents, you encourage your children to learn from their mistakes. When it comes to college savings, learning from other parents’ missteps or oversights can be a great untapped resource.
As college costs continue to rise, parents are expecting to pay more, so many are saving more. In fact, they are saving a lot more than they were 10 years ago, according to the latest Fidelity College Savings Indicator Study.1 Today, nearly three quarters of parents surveyed are saving for college vs. only half in 2007 when the study began. Now, some 43% of parents expect to pay all of the tuition costs themselves vs just 16% of parents surveyed in 2007 who said they intended to pay 100% of their children’s total college costs.
With rising college cost comes rising debt for many students and their parents. The 2016 college graduate with student-loan debt will have to pay back a little more than $37,000. Still, more parents are willing to make additional sacrifices and expect to pay more. “Today’s parents have learned from their own experiences paying for college and managing student loan debt. These parents clearly value the importance of a college degree and likely want to help shield their children from a heavy student debt burden after college,” says Keith Bernhardt, vice president of college planning at Fidelity.
According to the latest Fidelity College Savings Indicator Study, here are five lessons learned by parents of college-bound children who say they wished they had taken action sooner to boost their college savings preparedness:
|1.||Consider a 529 college savings account early.|
Although you can’t go back in time, 24% of parents surveyed said they wished they would have opened their 529 college savings account sooner.
Some new parents have other priorities and don’t think about starting to save for college for their young children. Others delay beginning to save for college until their child gets to an age when they express a career interest. Starting early will make a difference, both in terms of the money you contribute over time, and its potential to grow.
For example, two different families have a goal to save a total of $50,000 for college by the time their child is 18 years old. According to Fidelity’s college savings quick check*:
- Family A starts saving when their child is 12 years old, leaving six years to save. Assuming an annual 6% investment rate of return, Family A will need to save $579 per month to reach their goal.
- On the other hand, Family B starts saving when their child is born, giving them 18 years to save. Also assuming an annual 6% investment rate of return, Family B needs to save $450 less a month— just $129—to reach the same $50,000 savings goal.
While it’s always preferable to save as soon as possible, a late start is better than never starting at all.
*The college savings quick check calculator computes ending balances using client selected inputs for time horizon, savings amount, and investment return. Savings are assumed to be static for the entire time period and are compounded monthly, at the end of the month. Additionally, the calculator will solve how much monthly savings are needed to reach a static, customer provided, goal in the future. No taxes, investment risk, or investment management fees are considered in the analysis.
- Read Viewpoints: "Are you savings enough for college?"
- Watch a video: "Tuition tales: The importance of saving early."
|2.||Treat college savings like a monthly bill.|
Even though your kids might not be off to college yet, think about your college savings fund as a bill to pay. The real tuitions bills will soon hit your inbox. Sure, you already have a lot of daily living expenses like rent or mortgage payments, food, and entertainment, and contributing to a retirement fund. That’s a lot to balance.
In general, saving for retirement is a “must have” and saving for college is a “nice to have.” For many people, getting into the monthly and regular habit of contributing to their child’s college savings accounts early on is a great first step on the path making their “nice to have” goal a reality.
- Read Viewpoints: "Five common money mistakes to avoid."
|3.||Save $100 more per month for college.|
One of the surprising findings in the study was that 45% of parents with kids in 10th grade and higher said they could have saved an additional $100 or more each month for college. Of that group, half said they could have saved an additional $200 per month. These extra dollars, if invested early and given time to grow, could yield significant savings over time:
“For many families, finding an extra $50 or $100 per month may seem out of reach, but these extra dollars, consistently saved, could potentially boost college savings by nearly $20,000 or even $40,000,” added Bernhardt.
As you watch your kids grow up and get ready to leave the nest, remember that staying invested appropriately is key. One of the features of 529 plans is a “rolldown,” which automatically shifts your investment mix from more aggressive to more conservative as your child approaches college age. That can help manage potential adverse effects of a market downturn just when those tuition bills start to hit your inbox.
- Tip: To estimate how much a few extra dollars in saving could impact your college saving use Fidelity’s online college savings quick check.
|4.||Prioritize college savings over impulse purchases.|
As a parent, you’ve probably tried to show your kids how to save money: for example, bringing your lunch to work, taking public transportation, buying things on sale and teaching the critical difference between “wants” and “needs.” But even for those parents who lead by example through discipline and “saying no,” there are times when the consumer impulse gene overtakes the “save more for college” gene.
In our survey, 17% of parents said they could have saved more for college by reducing impulse purchases. To start to break the habit, try to avoid going to stores (or even online flash sales) that thrive on your emotional purchases. Make a list of when you’re vulnerable to these situations and take steps to physically avoid them. By cutting down on expensive or unneeded impulse items, you can improve your savings habits.
- Tip: Focus on making a budget and developing the discipline to stick with it. Make college savings automatic by setting up monthly deductions from your checking or saving account into a 529 account.
|5.||Make a solid plan for college savings.|
You may not feel comfortable sharing your personal finance details among your closest friends—but when you work with a financial advisor, talking about money is an everyday thing. And 11% of parents surveyed said they wished they had begun working with an advisor sooner. One question to ask them is “are we saving enough for college?”
To start to answer that question, you can compare your savings efforts with parents in our survey report who saved an average of $5,900 last year in their children’s college savings account(s). Parents with a financial plan in place reported saving an average of $6,300 last year toward future college expenses, versus only of $4,700 for those without a plan.
Even if you are able to save more, knowing how best to maximize those dollars remains challenging. Almost half of parents surveyed say they don’t fully understand how to invest their college savings and would like help. And seven out of 10 want more specific recommendations on how much they should save for college.
- Tip: Tap into online resources that can help you better plan, budget, and estimate the cost of college, including our college savings calculator.
- Read Viewpoints: "The ABCs of 529 college savings plans."
Take the time to plan
Saving for college requires a concerted effort over many years and there are lessons to be learned from parents who have already gone through the process. “It’s important to start when your children are young, manage their expectations, and be prepared to make course corrections along the way. By developing a plan early, adopting smart savings strategy, and seeking help along the way, parents can better keep their college savings on track along with other savings priorities like their own retirement,” says Bernhardt.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917