College Planning
Step 3: College Funding Savings Plan
Step 1: Planning for a College Education | Step 2: Goal for College Costs | Step 3: College Funding Savings Plan
Once you've determined how much money you'll need to finance your child's education, you can look at how to accumulate it. The most popular methods are lump-sum investing and regular monthly or quarterly investing.
How Lump-Sum Investing Works
Lump-sum investing involves putting aside a large one-time investment that builds over time through the power of compounded interest. Interest earned on a large lump-sum will be greater than the interest earned on smaller investments made over time. And as the interest builds, the lump-sum increases to earn even more interest. Therefore, the larger your investment, the more benefits you'll realize with this method. For example, a lump-sum amount of $5,000 invested for 15 years at a compounded annual interest rate of 10% would grow to $20,886. A lump-sum amount of $10,000 invested for 12 years at a compound interest rate of 10% would amount to $31,384.
Calculating a Lump-Sum Investment
To estimate what your lump-sum may be worth when your child is ready to matriculate, use Table 4 below. Calculate the number of years until your child is ready for college and multiply your lump-sum investment by the appropriate return-rate factor.
TABLE 4 - Lump-Sum Investment
No. of Years Until College | Lump Sum Return Rate Factor* | No. of Years Until College | Lump Sum Return Rate Factor* |
1 | 1.10 | 10 | 2.59 |
2 | 1.21 | 11 | 2.85 |
3 | 1.33 | 12 | 3.13 |
4 | 1.46 | 13 | 3.45 |
5 | 1.61 | 14 | 3.79 |
6 | 1.77 | 15 | 4.17 |
7 | 1.94 | 16 | 4.59 |
8 | 2.14 | 17 | 5.05 |
9 | 2.35 | 18 | 5.55 |
The Power of Monthly or Quarterly Investing
If lump-sum investing is not for you, an alternative way to accumulate funds is through regular monthly or quarterly investing. This method of saving is most easily and consistently executed through payroll deduction or direct deposit plans. These plans enable you to direct a portion of your pay to your college funding plan. This disciplined approach to saving can help you reach your goals.
How Much Should I Invest?
College Funding can be based upon your forecasted tuition, you can calculate how much you need to invest monthly, assuming a 10% pretax rate of return compounded annually. For example, if you've calculated that in 12 years your investment goal is $63,000, you'll need to set aside $246 a month, or $737 every quarter, to meet your financial goals.
TABLE 5 - Monthly or Quarterly Investments
1. | Future total cost of college funding (insert the figure from line 6 in Table 2 ). | $63,000 |
2. | Number of years until college: 18 minus your child's current age | 12 |
3. | Return Rate Factor: refer to Table 6 (below). | 21.38 |
4. | Annual target amount of investment: divide Line 1 by Line 3. | $2,947 |
5. | Amount to invest: divide Line 4 by 12 (for monthly payments) or divide Line 4 by 4 | $246 Monthly or $737 Quarterly |
TABLE 6 - Return Rate Factors
No. of Years Until College | Lump Sum Return Rate Factor* | No. of Years Until College | Lump Sum Return Rate Factor* |
1 | 1.00 | 10 | 15.94 |
2 | 2.10 | 11 | 18.53 |
3 | 3.31 | 12 | 21.38 |
4 | 4.64 | 13 | 24.52 |
5 | 6.11 | 14 | 27.98 |
6 | 7.72 | 15 | 31.77 |
7 | 9.49 | 16 | 35.95 |
8 | 11.44 | 17 | 40.55 |
9 | 13.58 | 18 | 45.60 |
Choose the Appropriate Investments for your Plan
With a reasonable idea of what your child's education will cost and how much you plan to invest in to meet that cost, you're ready to consider which investments will help meet your college funding goals. When it comes to college funding, there are many choices which may be appropriate mutual funds, CDs, stocks and bonds are all possibilities.
financial-services/college-planning/Alliance529.pdf
financial-services/college-planning/Fidelity-Advisor-Scholarshare-Atlantic-Financial-838719.PDF
In addition to saving for college did you know that Creative IRA Roth planning can leave a significant tax free legacy for a young child?
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