College Fund: When To Shift To Safer Investments?

College can be an excellent time to begin exploring investment opportunities, and there are many ways to save for college, from stocks to mutual funds and bonds. However, it's important to note that the cost of college is rising rapidly, and the average college student graduates with a significant amount of student loan debt. Therefore, it is crucial to start saving for college as early as possible and to utilize various investment vehicles, such as 529 plans, to take advantage of tax benefits and maximize returns. By starting early and investing regularly, individuals can give themselves the best chance to cover college costs and avoid taking on excessive student loan debt.

How to choose the right college fund

Choosing the right college fund is an important decision that can impact your child's future financial well-being. Here are some detailed and instructive guidelines on how to choose the right college fund:

Understand the Different Types of College Funds:

College funds come in various forms, including Education Savings Accounts (ESAs), 529 plans, Uniform Transfers to Minors Act (UTMA), and Uniform Gifts to Minors Act (UGMA). Each type has its own advantages, eligibility requirements, and tax implications.

Assess Your Financial Situation:

Consider your current financial circumstances, including your income, expenses, and savings. This will help you determine how much you can realistically contribute to the college fund. It's important to strike a balance between saving for your child's education and ensuring your own financial stability.

Start Saving Early:

The earlier you start saving for your child's college fund, the better. Time is a crucial factor in building a substantial fund. Even if you can only contribute a small amount each month, starting early will allow compound interest to work its magic and grow your savings over time.

Compare Different Investment Options:

Research and compare the investment options available within college funds. Look for plans that offer a good balance between risk and return. Consider the historical performance of various investment options, but remember that past performance doesn't guarantee future results.

Evaluate Fees and Expenses:

Pay close attention to the fees and expenses associated with different college funds. These can include administrative fees, management fees, and fund expenses. Minimizing fees will help maximize the amount of money that goes towards your child's education.

Consider State-Sponsored Plans:

Look into state-sponsored 529 plans, as they often come with additional tax benefits and incentives. However, don't feel limited to your own state's plan. You can shop around and choose a plan from another state that offers lower fees and better investment choices.

Seek Professional Advice:

If you're unsure about which college fund to choose, consider consulting a financial advisor or investing professional. They can provide personalized guidance based on your specific circumstances and help you navigate the various investment options available.

Encourage Your Child's Involvement:

Involve your child in the process of saving for their education. Encourage them to apply for scholarships, choose an affordable school, live at home, or work part-time to contribute to their college fund. This will foster a sense of responsibility and help them understand the value of money.

Remember, choosing the right college fund is a long-term decision that requires careful consideration of your financial situation, investment options, and the specific needs of your child's education. It's important to stay informed, be proactive, and make adjustments as needed to ensure the college fund aligns with your goals.

When to start saving for college

The general consensus is that the best time to start saving for college is as early as possible. The earlier you save, the more time your money has to grow. This is due to the magic of compounding—when your returns earn more returns and so on.

For example, if you start saving for college when your child is born, you could invest in an account and save $25 a week for the first 9 years of their life but then stop—for a total investment of $11,700. If your account earns 6% a year, you'll have about $26,750 at the end of 18 years. However, if you wait 9 years to start saving, you will have accumulated about $15,800 by the time they go off to college.

If you are unable to start saving for college early, there is still value in starting later. The dollars you save won't have as much time to grow, but they are still dollars you won't be borrowing.

There are several different ways to save for college. Many parents choose to set aside money in a regular bank savings account, or even a checking account. Others use their own brokerage account to invest for college, and plan to sell investments and withdraw funds when the time comes. There are also college-specific and other tax-advantaged savings vehicles, such as 529 plans, Coverdell ESAs, and Roth IRAs.

How much to save for college

The amount you should save for college depends on a number of factors, including the type of school your child will attend, their age, and the amount of scholarships and financial aid they are likely to receive.

The average cost of a college education varies depending on the type of school and whether it is in-state or out-of-state. For the 2023-2024 school year, the average cost of attendance was:

• $19,860 for a public, two-year college
• $28,840 for a public, four-year, in-state college
• $46,730 for a public, four-year, out-of-state college
• $60,420 for a private, four-year college

These costs are expected to double over the next 10 years, so it is important to start saving early. Most experts recommend saving at least one-third of the projected total cost of tuition and fees, assuming the student will also apply for scholarships and financial aid.

If you start saving at birth, aim for contributions of $50-$100 per month. As your child gets older, you can increase these contributions. By the time your child is in high school, you should aim to save $300-$500 per month.

Types of College Savings Accounts

There are several types of savings accounts that can be used to save for college, each with its own benefits, contribution limits, and tax implications. Here are some of the most common types of college savings accounts:

• 529 plans: These plans offer tax-free growth and withdrawals and are offered in almost every state. They typically have high contribution limits, often as much as $350,000 or more.
• Coverdell Education Savings Accounts (ESAs): Similar to 529 plans, ESAs allow you to contribute up to $2,000 per year, with tax-deferred growth and tax-free withdrawals. However, there are income limits for contributors, and the funds must be used by the beneficiary before their 30th birthday.
• Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA) custodial accounts: These accounts allow parents to transfer assets to a minor child in their name. The assets legally belong to the child, and control is transferred to them when they reach the age of maturity (typically between 18-21 years old). UGMA/UTMA accounts can be used for expenses beyond just college, but the child can choose to spend the money on anything they want once they gain control of the account.
• Roth IRA: While a Roth IRA is meant for retirement, you can use it to pay for college without penalty. Earnings grow tax-free, and qualified withdrawals are not taxed. The contribution limit for 2023 is $6,000 per year.

What are the different types of investments

There are various types of investments, each carrying different levels of risk and potential reward. Here are some of the most common types of investments:

Stocks

When you buy stock, you're purchasing a small percentage of ownership in a company. If the company performs well and makes a profit, the value of your stock tends to increase. Stocks are typically considered riskier than other investments, but they can also offer higher returns.

Bonds

Bonds are essentially loans made to companies or governments. When you buy a bond, you're lending money to the issuer, who pays you back with interest over time. Bonds are generally considered less risky than stocks, but they may offer lower returns. The primary risk associated with bonds is the possibility of the issuer defaulting on the loan.

Mutual Funds

Mutual funds are investment vehicles that pool money from multiple investors and diversify it across various stocks, bonds, or other assets. The fund is managed by a professional money manager, who decides how to allocate the pooled funds. The level of risk associated with mutual funds depends on the types of investments the fund focuses on.

Exchange-Traded Funds (ETFs)

ETFs are similar to mutual funds in that they also pool investor money and invest in a diversified portfolio of stocks, bonds, or other assets. However, ETFs are traded on an exchange like stocks, meaning their price fluctuates throughout the trading day. ETFs are often considered a more affordable option than mutual funds since they don't have active fund managers.

Options

Options are contracts that give the holder the right, but not the obligation, to buy or sell a specific security at a predetermined price within a specified time frame. Options offer flexibility and can be used to hedge risk or speculate on the future price movement of an underlying asset.

High-Yield Savings Accounts and Certificates of Deposit (CDs)

While not typically considered traditional investments, high-yield savings accounts and CDs are worth mentioning. High-yield savings accounts offer higher interest rates than traditional savings accounts, providing a relatively safe way to grow your money. CDs, on the other hand, are agreements to keep your money in a bank for a fixed period, during which it earns interest at a specified rate.

Real Estate

Real estate investing involves purchasing property, such as land, houses, or commercial buildings, with the intent to generate income or profit. This can be done through direct ownership, real estate investment trusts (REITs), or other investment vehicles. Real estate investing often requires more capital upfront but can provide steady income and potential for capital appreciation.

Cryptocurrency

Cryptocurrency is a digital or virtual currency that uses cryptography for security and is typically decentralized. Investing in cryptocurrencies like Bitcoin can offer high potential returns but also carries significant risk due to their volatility and lack of regulation.

Robo-Advisors and Micro-Investing Apps

Robo-advisors are digital platforms that use algorithms and automated systems to provide investment advice and manage portfolios for clients. They offer a low-cost, hands-off approach to investing. Micro-investing apps, on the other hand, allow individuals to invest small amounts of money, often by rounding up purchases and investing the difference.

Retirement Accounts (IRAs)

Individual Retirement Accounts (IRAs) are tax-advantaged savings accounts designed for long-term retirement savings. There are different types of IRAs, such as Roth IRAs and Traditional IRAs, each with its own tax implications. IRAs offer a way to save for retirement while potentially reducing your tax burden.

What are the best investment options for college students

College can be an excellent time to start investing. Even with minimal funds, students can begin to build a portfolio and learn valuable lessons about investing and dealing with losses without risking large sums of money. Here are some of the best investment options for college students:

• High-yield savings accounts or Certificates of Deposit (CDs): These are simple, safe, and effective ways to boost your savings. CDs offer a fixed interest rate in exchange for keeping your money in the bank for a specified period. High-yield savings accounts, meanwhile, offer higher interest rates than traditional savings or checking accounts and usually allow you to withdraw money at any time.
• Free or low-cost brokers: Many online brokers, such as Fidelity Investments and Charles Schwab, offer free stock and ETF trades, along with educational tools to help beginners get started. Robinhood is another option, offering completely free trading and Morningstar research for $5 per month.
• S&P 500 index fund: Buying an S&P 500 index fund is like buying the market, and you'll get the market return. This strategy is recommended by legendary investor Warren Buffett.
• Robo-advisors: Robo-advisors create a portfolio for you based on your time horizon and risk tolerance. They usually charge a small percentage of your assets, and you can get started with a small amount of money. Examples include Wealthfront and Betterment.
• Investing apps: Apps like Stash and Acorns allow you to buy stocks or ETFs with very little money. They are simple to use and can help you learn the basics of investing.
• Individual Retirement Account (IRA): An IRA is a long-term savings account with various tax benefits. Roth IRAs are a popular choice for college students because they allow you to take advantage of a lower tax bracket.
• Stocks: When you buy a stock, you're buying a small percentage of a company. Stocks come with risks, but it's best to think long-term when investing in them.
• Bonds: A bond is essentially an IOU. It's a low-risk investment where you lend money to a company or government body, and they pay you interest.
• Mutual Funds: Mutual funds pool your money with other investors, and a professional money manager diversifies it across various stocks and bonds. Risk levels depend on the types of accounts you invest in.
• Exchange-Traded Funds (ETFs): ETFs are similar to stocks but are a bundle of many different stocks or bonds managed by financial experts. They are highly diversified and typically offer less volatile returns than individual stocks.
• Real Estate Investment Trusts (REITs): REITs allow you to invest in the real estate market without directly owning properties. You can invest in publicly traded REITs listed on stock exchanges and benefit from rental income.

Frequently asked questions