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Summer is drawing near, and that means it’s time for families with high school students to start scheduling college visits. But before you do, you ought to look over your financials—something easier said than done. We asked Rachel Namoff, a managing partner at Denver’s Arapho Asset Management, to lay out a simple plan parents can follow while saving for their kids’ impending college careers.
First, Namoff recommends creating different accounts for each of your children, then chat with a financial expert and start saving. “Save as much as you can afford for your kids to go to college, but it really depends on your income,” Namoff says. “In a perfect world, we are all earning way more than we are spending, but the ideal amount is a moving target with many different variables.” Namoff suggests breaking your child’s first 17 years into three categories—newborn, eight years old, and 17 years old—as your strategy will morph as your kid matures. Here’s how to get started:
Newborn: Invest 100 percent in equities
In the first years of your child’s life, be as aggressive as you feel comfortable with. Save and invest as much as possible, even if you have less liquid cash during this time. Equities (stocks and shares that don’t carry a fixed interest) can flourish over time more than fixed income investments such as bonds. Tip: Try to put away even $10 to $15 per month, per child, as it will make a major difference with long-term compounding interest. Of course, it’s important for parents to pay down lingering debts and save for retirement ahead of putting money away for college, but any extra cash you can earmark for it will help. A great place to start is 529 plans as they offer tax savings.
Eight-year-old: Invest 70 percent in equities, 30 percent in fixed-income options
Start decreasing your risk by moving a third of your investments into a safer fixed income bucket. As your family income (hopefully) increases, this is the time to increase contributions to college savings plans as well. Tip: Bump the contribution up to $50 to $100 per child.
17-year-old: Invest 30 percent in equities, 70 percent in fixed-incomes options
Look at exactly how much money is earmarked for the impending four years of tuition bills. Take away the major risk by funneling investments into less volatile bonds and CDs. With university acceptance letters (and hopefully scholarship awards) in hand, it’s time to see if nearly two decades of stashing cash will be enough. Tip: Ask the tough questions. Is your child contributing to his/her college expenses? Have you looked into scholarship and loan options? Would your child be best suited to attend a community college for two years?
The biggest mistake you can make with college savings is not doing anything. Remember that every little bit counts, especially if you get started early.
Follow assistant editor Lindsey R. McKissick on Twitter @LindseyRMcK.