Why You Should Start Saving Early for Your Child’s College Education
In this day and age, with competition high for just about every job, it is imperative for kids to obtain a college degree if they want to be able to get their foot in the door and find a job with which to support themselves. It is your duty, as a parent, to do everything within your power to see them through (unless you relish the thought of supporting your kids for the rest of your life). And although you may not have a lot of money to put into a savings account as you raise them, you might be surprised how much you can accumulate over 18 years, even if you’re only putting $50 each month into some kind of investment account. It may not send them to Harvard, but it might just be enough for community college and state school.
In truth, putting money into a savings account is not the best way to go about making your money work for you. It is simple enough to arrange a monthly transfer to a savings account through your bank; and that’s what most people do because it is automated and they never have to think about it. But this is your child’s future, so you may want to spare a few seconds to consider the best way to raise money for their college tuition. A savings account at most banks will only net you about 1% in interest (or less). It’s better than a checking account (which earns no interest at all), but not by much. What you may want to do instead is look into different ways to invest the money you’re saving.
To that end, there are a couple of options you may want to explore, and each one has some pros and cons to mull over. A stock portfolio has the potential to earn the most. High-risk stocks could bring you a huge return on your investment, but they are called high-risk for a reason; the possibility that you will lose anything you put into them is also pretty high. The best way to go when it comes to a stock portfolio is to diversify. Experts recommend that you spread about 80% of your investment between low-risk stocks, bonds, and mutual funds, all of which are fairly safe, and then put the remaining 20% into higher-risk options. This way if you lose in one area, you’ll still come out ahead. And this method of investing tends to show an estimated 10-12% return. That’s pretty great, especially if you continue to add money to the account.
However, there are also less risky ways to get more from your money. By putting your child’s college fund into certificates of deposit (CDs), you can keep the money incredibly safe (since they’re issued directly by the bank) and earn anywhere from about 2.5-4% interest (which will compound if you reinvest it in new CDs when the old ones mature). Higher interest rates will be offered for longer durations of maturation (which range from six months to a year). Although you don’t stand to receive the same type of returns you could get from stocks and bonds, you’ll never have to worry about losing the money you put into a CD. Of course, the best option is to help your child obtain a scholarship. That way you can use the money you save to go on a well-deserved cruise!
Sarah Danielson writes for Go College where you can find helpful information on the Montgomery GI Bill and graduate plus loans.