When should you start saving for college?
Childhood goes from crib to kindergarten in the blink of an eye. Before you know it, college will be next. But you'll be ready!
Short answer: The earlier, the better
The earlier you save, the more time your money has to grow. This is the magic of compounding—when your returns earn more returns and so on.
Here's an example
Let's say you start saving for college when your child is born. You invest in an account and save $25 a week for the first 9 years of his or her 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.
Now let's say you wait 9 years before you start to save, and then save the same $25 per week until your child is 18. Factoring in the $11,700 investment and 6% return, you'll have accumulated about $15,800 by the time he or she goes off to college.
As you can see, you'll earn almost $11,000 more for college in the first scenario, thanks to the power of compounding!
Saving earlier means you'll have more for college
This hypothetical illustration assumes an annual 6% return. This illustration does not represent any particular investment nor does it account for inflation or taxes.
… But it's never too late
Even though the benefits of saving early are dramatic, there's still value in starting now—even if your child is in high school. The dollars you save won't have as much time to grow, but they're still dollars you won't be borrowing.
And don't forget, your child will be in college for several years. So consider leaving your money in the account as long as possible to let it grow.
Good to know!
Only 529 plans offer both tax deductions (depending on your state) and tax-free withdrawals when used for college.*
The clock is ticking!
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WHERE DOES COLLEGE FIT INTO YOUR PRIORITIES?
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 the example above, you'd earn over $800 in the 18th year.
Contributions you can subtract from your income on your tax return, resulting in a lower tax bill.
Money you can take out of your account without owing any federal income tax, even if some of it has never been taxed.