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The right way to manage college savings

Once your account is open, make sure you're following these easy steps that will give you the best chance at college saving success.

1. Save regularly

Getting a head start on your savings is key, but you also want to make sure you continue saving once you've opened an account!

Most types of accounts let you automate your savings—contribute on a regular basis—by syncing up your bank account with your college account. And let's face it, we could all use one less thing to remember.

The downside to forgetting to contribute—or "running out" of money before saving in your college account—can be big. Because you'll miss out on earnings and the compounding on those earnings, the loss in your account can be much bigger than the amount of the contribution you missed.

2. Focus on your goal, not your account balance

Like many big goals, saving for college is more like a marathon than a sprint. It's going to take a while and it will occasionally be a little monotonous. The best thing you can do is settle into a good saving rhythm.

Here are some saving don'ts:

Don't look for shortcuts.

Once you've spent time determining the asset mix that's best for you, be careful not to veer off course.

Keep in mind that, at any given time, certain types of investments will do better than others. If you constantly change direction to take advantage, you could find yourself falling farther and farther behind.

Instead, stick with your plan and know that you'll get to the finish line in good time.

Don't pay too much attention to the markets.

Downturns in the market might feel like being caught outside in a storm. But if you flee for cover just because there's a little wind in your face, you'll miss out on the times when the wind is at your back.

Instead, force yourself to invest a consistent amount in the same mix of assets every week or month, no matter what's happening on Wall Street. That way, you ensure you're buying more of an investment when its price has fallen and less of it when it's up. Buy low, sell high—sound familiar?

3. Check in on your accounts—occasionally

Once a year, preferably at the same time each year, you should take a close look at your college savings to see how they're progressing.

Ask yourself these questions:

Have your needs or your resources changed?

You might plan to save more if you've had another child (congrats!), someone has set their sights on Harvard instead of State U., or you've received a raise at work.

Or you might be able to save less if your prodigy is headed toward a full scholarship or grandma left the kids an inheritance.

Are your earnings keeping pace with expectations?

When you set a yearly, monthly, or weekly savings amount that will allow you to meet your overall goal, you assume you'll earn a certain rate of return.

But if your plan has been in place for a while and you've found that your expectations were a bit off the mark—perhaps the markets have performed better or worse than average—it may be time to make an adjustment.

If you're lucky and the markets have been strong, you may be close to or above your goal with many years left for your account to grow. In that case, you could lower your monthly savings amount.

On the other hand, if you've been through a prolonged bear market, you may need to consider increasing your monthly savings if you still plan to meet the same goal.

The wrong thing to do is to take on more risk to try to make up for low returns. That could just leave you in an even worse position.

Do you need to rebalance or change your asset mix?

The same market movements that might cause you to rethink your savings amounts could also mess up your carefully thought-out asset mix. If that's the case, you'll need to take steps to get your account rebalanced.

Even if your original asset mix is intact, you should consider whether it's still the right mix for you—as your child gets closer to college, you'll want to move to more conservative investments. This will lessen the chance of your account being impacted if the market goes down right before you need to start taking money out.

Sound like a lot of work?

Depending on which account type you choose, some types of investments can be managed for you so you can spend your time and energy on other things.


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REFERENCE CONTENT

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Earnings

The investment returns you accumulate on the savings in your account.

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Compounding

When earnings on invested money generate their own earnings. For example, if you invested $5,000 and earned 6% a year, in the first year you'd earn $300 ($5,000 x 0.06), in the second year you'd earn $318 ($5,300 x 0.06), in the third year you'd earn $337.08 ($5,618 x 0.06), and so on. Over longer periods of time, compounding becomes very powerful. In this example, you'd earn over $800 in the 18th year.

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Contributions

The yearly, monthly, or weekly amounts you save in your account.

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Asset mix

The way your account is divided among different asset classes, including stock, bond, and short-term or "cash" investments.

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Rate of return

The profit you get from investing money. Over time, this profit is based mainly on the amount of risk associated with the investment. So, for example, less-risky investments like certificates of deposit (CDs) or savings accounts generally earn a low rate of return, and higher-risk investments like stocks generally earn a higher rate of return.

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Returns

The profit you get from investing money. Over time, this profit is based mainly on the amount of risk associated with the investment. So, for example, less-risky investments like certificates of deposit (CDs) or savings accounts generally earn a low rate of return, and higher-risk investments like stocks generally earn a higher rate of return.

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Portfolio

A complete view of all the money in your account—i.e., not specific investments.

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Asset class

A major type of asset—stocks, bonds, and short-term or "cash" investments.

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Conservative

A conservative portfolio is relatively safe from investment risk (although there's no guarantee it won't lose money). Because risk and reward are related, a conservative investor can also expect returns that are, on average and over time, lower than those of someone with a moderate or aggressive portfolio.