In my last post, Saving for College: Coverdell Education Savings Account vs. 529 Plan, we explored the two most-used vehicles for saving for your children’s college education. Next up? Determining how much you really need to save monthly or yearly in order to have enough money to pay for a college education. This answer will largely depend on whether you will be funding in-state or out-of-state education, state university or private education.
The first step is to estimate how much you will need to pay for education expenses. In other words, what is the end goal?
The best resource I have found is at finaid.org. This website allows you to project what the costs will be when your child attends college. For example, if your child were to attend the University of Colorado at Boulder Leeds School of Business for the 2012-13 academic year, in-state tuition ($14,254), plus on-campus room and board($11,730) plus books/supplies ($1,992) equal $27,976. This is according to CU’s website.
For my 4 year old, finaid.org projects that the total costs at a 4% inflation rate for four years (let’s hope it is only 4) would be $205,721.56. For a nonresident, the cost is much higher.
For the 2012-13 academic year, the cost for the same categories as a non-resident would be $48,791. Again for my 4 year old, finid.org projects that the total costs for four years at a 4% tuition inflation rate, would be $358,784.70. These two examples give you a decent idea of the potential cost of college for our children 14 years from now.
The next question to consider: How much do you need to save per month in order to meet your goal?
To answer this question, I used a growth calculator you can find here.
To fund the projected in-state costs of a four year education at the University of Colorado at Boulder of $205,721.56, at an 8 percent growth rate, you would need to save more than $650 per month for 14 years -- assuming you began saving when you child was age 4. If you had enough foresight to begin the day your child was born, you have another four years of earnings and you would need to save approximately $425 per month.
To fund the projected total costs for the non-resident amount of $358,784.70 you would need to save a staggering amount of over $1150 per month, if you began when your child was 4 years old. If you began when your child was born, you would need to save over $725 per month. Again, this assumes an 8 percent growth rate. The lower growth rate you assume, obviously the more you will need to save per month. And the sooner you begin saving, the less you will need to save.
When you put pen to paper, these numbers are certainly overwhelming. This is not a perfect science since all of these numbers have built in assumptions about the growth of the cost of a college education and the growth of your investments.
No matter what, we know from what is in the news and from this analysis that it is never too early to start saving for your children’s education.
Again, I encourage you to consult your tax expert and your financial expert to set up a plan that fits your budget and needs.
Other articles you may be interested in:
Saving for College: Coverdell Education Savings Account vs. 529 Plan