Craig Guillot is the author of Stuff About Money: No BS Financial Advice for Regular People.
The end of this month will mark the first year of life for my first born child and my first year as a father. Along with feedings, diaper changes and the joy of watching her grow, I’ve placed a great priority on saving for her future.
My parents fully funded my college education and while it may be increasingly difficult to do that in the future on a middle-class income, I’m going to try as hard as I can to provide that same gift for my child.
The best, and most often overlooked, thing you can do to maximize your college fund is to start saving as early as possible. My rule of thumb has been to aim to put away $1 for every diaper you change from the time they’re born.
Do that and you could easily have an $8,000 fund by the time they’re age four. Of course, you shouldn’t stop saving there but that boost early on can give you extra growth because of compounding.
Some people thought it was strange that I opened up her education fund when my daughter was barely a week out of the womb. The fact is I started saving over a year before she was even conceived.
Starting too late is better than never but the earlier you start saving, the easier it will be to accumulate more money for college. Consider that if you start putting away $200 per month when your child is born and can average a 6% return, you’ll have $78,000 when they’re a senior in high school.
If you wait until they’re age 10, you’d have to put away $625 per month to reach that amount.
Compounding can take a little care of some of the heavy lifting. It amplifies your return over time, will give you a bigger fund and will ultimately allow you to save less.
By saving early in the example above, you’ll have made $52,000 in contributions with the other $26,000 coming from capital gains. That’s free money, money you don’t have to work for and save.
When you start building a college fund at birth, you also get a longer period of time to take advantage of market ups and downs. And if you’re taking an active role in managing your child’s education fund and have a long-term view, this can be an especially interesting time to invest.
I’ve used the recent market turmoil as an opportunity to buy some heavily discounted stocks for her Education Savings Account. She’s about to turn a year old this month but has already earned 11% on her portfolio including dividends and capital gains. And this is at a time when most investor’s portfolios are in the red for the year.
But I’m ultimately not concerned about where the market is going to be next month, next year or even in five years. I’m thinking about where it’s going to be in 2029 when my daughter is ready to head off to college.
By investing small amounts early and continuing those contributions over 18 years, I’ve got more time to ride out the ebbs and flows of the market.
Here in the South, $80,000 can cover a large portion, if not all, of tuition and living expenses at a good public university. The best way for my to reach that goal, and hopefully surpass it, is to save as much as I can now.
No matter how you manage the money or whether you’re putting it in an ESA, 529 or a Roth, you can do yourself and your child a big favor by starting as early as possible.
Every time you change a diaper, make a $1 contribution to the college fund and you’ll be well ahead of the game by the time your child starts grade school.