Are you confused as to how much you should save for your kid's college education? Here's everything you need to know to fit your budget.
Paying for your child’s education is not like buying a toy or a new car. It’s a different beast. But saving for your child’s college education helps you take control of your family’s financial future, in much the same way that having an investment portfolio does.
But how much should you save for your kid’s college education? Here’s how to figure out what works for you.
1. Set Your Future College Savings Goal
The bad news is that college costs are expected to double again over the next 10 years. The good news? You don’t have to save for the full cost. Shoot for one-third.
Why? The remaining two-thirds can be filled in by scholarships, financial aid and current income (whether that’s your income or your student’s money from a job or work-study). This is a rule of thumb used by financial advisors across the country. It can also save your sanity by making your savings goal a little more realistic.
Say you’re planning for a child who’s 4 years old today. Your college savings goal should be $60,400 for a public, in-state college; $95,600 for a public, out-of-state college; and $118,900 for a private college.
If these numbers seem daunting, don’t worry. There are ways to break it down into an achievable monthly contribution. But first, here’s a little secret that could cut your monthly contribution in half.
2. Invest Your Savings With A 529 College Savings Plan
Nearly 7 in 10 parents aren’t familiar with a 529 college savings plan.
A 529 college savings plan can help your savings go further. It’s a tax-advantaged investment account that works like a Roth IRA, offering tax-free growth and tax-free withdrawals. And yes, parents can open a 529 plan for their child’s college savings. It’s not just for grandparents!
Most 529 plans also offer a passively invested, age-adjusting portfolio option that starts with higher growth investments (e.g., stocks) and becomes more conservative as your child approaches college. This means your money grows over time, but you’re also reducing riskas it becomes time to pay for college.
What difference do these tax savings and investment gains make? If you have a 4-year-old child targeting a private university, your monthly savings goal might be $700/month using a savings account versus $400/month with a 529 college savings plan. That’s a big difference!
There are a lot of 529 plan options, but investing doesn’t have to be complicated. Get started by:
- Comparing the fees and investment portfolio options. Look for a low-fee plan (usually offered directly by a state) with age-adjusting portfolio options.
- Checking if your state offers an income tax deduction for using its plan. If so, take advantage. But remember, you can have multiple 529s, especially if you want to use a better plan for contributions beyond your state’s deductible amount.
- Making sure it’s easy for you (and your family) to use. If you want to get the grandparents involved, make it easy for them!
READ MORE: How To Navigate Saving For Retirement While Paying For College
3. Commit to a Monthly Contribution
But how much should you be saving right now? Let’s assume you are shooting for one-third of the projected cost of college, and you’re using a 529 college savings plan to invest your savings and gain its tax advantages over time. If you’re saving for a 4-year-old child, here are your estimated monthly contributions.
- Public (in-state): estimated $210/month
- Public (out-of-state): estimated $330/month
- Private: estimated $415/month
Remember, these numbers only work if you start investing early with a 529 college savings plan. This way, you will benefit from investment gains, plus tax savings on those gains. Is this achievable for you? If so, great! If not, keep reading.
4. Adjust for Your Personal Situation
The best monthly savings goal is the one you’ll stick to, so choose one that fits your budget. For many families, this is about 10 percent of discretionary income.
Beyond that, ask yourself: Who are the important people in my child’s life? Most likely, many of them would love to help, and there are many occasions when they can: birthday parties, holidays, early school graduations, and other personal milestones.
Ask relatives to swap out a gift for a birthday or holiday and give a small contribution to college instead. Your child won’t know the difference — and let’s be honest, they probably have too many toys as it is.
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FAQs
It can also save your sanity by making your savings goal a little more realistic. Say you're planning for a child who's 4 years old today. Your college savings goal should be $60,400 for a public, in-state college; $95,600 for a public, out-of-state college; and $118,900 for a private college.
How much should I save for my child's college tuition? ›
Most experts recommend saving at least one-third of the projected total cost of tuition and fees. This advice assumes the student plans to apply for scholarships and financial aid.
How much should I put in my child's 529 per month? ›
Ideally, you should save at least $250 per month if you anticipate your child attending an in-state college (four years, public), $450 per month for an out-of-state public four-year college, and $550 per month for a private non-profit four-year college, from birth to college enrollment.
How much do kids save for college on average? ›
College Savings Statistics. Report Highlights. American college students and their families pay 50% of college costs out-of-pocket, equivalent to $14,000 per student for the 2022-2023 academic year. 30% of families use a college savings fund (such as a tax-deductible 529 plan) to save an average of $7,806 each.
How much in savings should a college student have? ›
A good goal for the amount to save in an emergency fund is three to six months of your expenses. That might sound like a lot, but you can build your savings slowly over time.
How much do most parents have saved for college? ›
Amount Parents Have Saved for College
In our survey, we asked parents how much they have saved for college. About 5% hadn't started saving yet. Of those that had, just over 30% had saved $10,000 or less, 25% had saved between $10,000 and $30,000, and about 40% had saved more than $30,000.
What is the best budget rule for college students? ›
A good college budget prioritizes needs and savings over wants. A good template to follow when budgeting is the 50-30-20 ratio—50% of your income covers needs, 30% goes toward wants and 20% is for savings. This format can guide you in creating your next spending plan.
How much is $100 a month in a 529 for 18 years? ›
This chart shows that a monthly contribution of $100 will compound more if you start saving earlier, giving the money more time to grow. If you save $100 a month for 18 years, your ending balance could be $35,400. If you save $100 a month for 9 years, your ending balance could be about $13,900.
What is the average 529 balance by age? ›
College Savings Plan Balances by Age
| Child's Age in years | Average Amount Saved in a 529 College Savings Plan | Average Amount Saved in a Prepaid State Plan |
|---|
| 0-6 | $9,196 | $1,656 |
| 7-12 | $14,787 | $3,415 |
| 13-17 | $24,618 | $7,354 |
| 18+ | $25,596 | $26,450 |
Jan 5, 2023
Coverdell accounts and 529 plans are the most popular options for college savings, but custodial trust accounts structured as a Uniform Gift to Minors Act (UGMA) or a Uniform Transfer to Minors Act (UTMA) are other possibilities.
Beginning in 2024, you can transfer unused funds in a 529 plan to a Roth IRA for the same beneficiary, without tax or penalties. These rollovers are subject to several rules and limits: Transfers have a lifetime maximum of $35,000 per beneficiary. The 529 plan must have existed for at least 15 years.
How much to put in 529 Dave Ramsey? ›
Ramsey said he should put in $20,000 at most, and he advised against overfunding 529 plans. “I would not overfund your 529. At today's world, I would underfund your 529 … The higher ed landscape is going to change so much in the next 18 years as the student loan epic failure debacle unfolds,” Ramsey said.
Can 529 be used for room and board? ›
Yes, 529 funds can be used for room and board, whether you're living on-campus or off-campus. Room and board is a qualified education expense under 529 plans up to your school's cost of attendance.
What is the 50 30 20 rule? ›
The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.
What is a good monthly allowance for a college student? ›
Average College Monthly Allowance
That amount may cover clothing, laundry, toiletries, entertainment, etc. Considering that semesters are usually four months in length and students complete two semesters per year, we find that the average monthly spending for college students is approximately $260.
How many college students live paycheck to paycheck? ›
Another sobering finding is that over 60 percent of employed student respondents said that they always live “paycheck to paycheck.” That number climbs to 74 percent of working students with dependent children.
How do parents afford college tuition? ›
Most families pay for college using some combination of savings, income and financial aid. Financial aid is money you receive to help cover college costs. Some financial aid, like grants and scholarships, doesn't need to be repaid. Financial aid can also come in the form of loans — money you have to repay.
How much money does a college kid need per month? ›
Average College Monthly Allowance
| Public Four-Year University (In-State, On-Campus) | Private Four-Year School |
|---|
| Books and Supplies | $1,250 | $1,250 |
| Transportation | $1,290 | $1,100 |
| Other Expenses | $2,270 | $1,880 |
| Total | $28,840 | $60,420 |
2 more rowsAug 15, 2024
Bottom Line. California's 529 plans provide a valuable framework for families to save for educational expenses with tax advantages, despite the absence of state tax deductions. These plans offer tax-deferred growth and tax-free withdrawals for qualified expenses, which can significantly boost savings over time.
