David Levy, an editor of Edvisors Network, a planning and paying for college information source said, saving money enough for costs of college like to climb a towering mountain, especially for new parents. College costs seem to be triple from the time children are born to when they are ready for school.
For early making smart decisions,new parents can set themselves up to reach their college savings targets. Below are five mistakes for college savings that new parents make – and how to avoid them.
1. Let time pass: If parents wait until their children get intohigh school to start saving for college, they will have to contribute six times as much per month as parents who start saving from birth, Levy said that.
And Mari Adam, a certified financial planner and president of Boca Raton, Florida-based fee-only firm Adam Financial Associates Inc also said that “What people forget is the most powerful tool you have on your side when it comes to saving for any goal, is time,” Fee-only firms don’t pay a commission for buying or selling their products. “If you can use the power of compounding to your advantage, and if you start now, you can save much more.”
Parents can also invest more aggressively and seek a higher rate of return when a child is younger, says Matt Olver, senior vice president and wealth advisor at Cleveland-based Spero-Smith Investment Advisers Inc., also a fee-only investment management firm. That’s because they have much more time to weather the swings of the stock market, he says.”In terms of the return opportunity, it’s probably even better for you when that child is younger,”.
2. Give up to sticker shock:Levy says “They’re looking at what that cost of attendance is now – looking at what it might be 17 years from now – and they’re deciding why even start? There’s no point,”
But families don’t need to plan for paying for 100% of the college costs. They can use college calculators to get a sense of how much college is costed among in-state public colleges, out-of-state public colleges and private colleges, after that they can set a monthly savings plan based on how much they need to pay.
Adam says “Do somethings in advance. No one said you have to pay for the whole thing immediately.”
Levy recommends using the “one-third rule.” Make a plan to save enough to pay for one-third of the college costs, and to use income, aid and loans to complete the other two-thirds.
Olver says “Automated payments into an investment vehicle specifically earmarked for college can also be helpful in reaching a savings goal.Get it out of sight and out of your account before you have the chance to spend it,”.
3. Invest to wrong vehicle: Some types of investments can make unfavorable taxation and financial aid treatment, or they simply won’t keep up with the rising cost of college.
For example, earnings on custodial accounts, called UTMAs, Uniform Transfers to Minors Act, or UGMAs, Uniform Gifts to Minors Act, above certain levels are taxed with higher parent rate, Adam says, and because they are considered assets of the student, even they are weighed heavily in the financial aid formula.
She also gives 529 plans for college savings, these allow money to grow tax-deferred. Distributions are not taxed as long as they’re used for qualified higher education expenses, and many states offer tax credits or deductions. These 529 plans are also considered parent assets in the financial aid formula, which means that they are treated more favorably than assets in a student’s name.
Another problem is using a low-return vehicle – like a traditional savings account or certificate of deposit. Tuition inflation is historically about twice the growth rate of the consumer price index. Therefore, Levy says.”You want to pick something that matches your time horizon,” And Adam says. “If you’ve got an 18-year time horizon, pick something that is very growth-oriented.”
4. Consider a financial advisor is important:Some new parents think that they need an financial advisor before they start saving. That’s not important.But Olver says
“You don’t need an advisor. You don’t need to pay anybody to be able to invest in a 529 plan.”
5. Ignore retirement: As important as it should be save for college early, that doesn’t mean that new parents should ignore their own retirement savings. At least, they should maximize the company match. Olver also says “There’s no way to borrow for retirement, there are ways you can pay for school.”
Tags: #Education USA