When should you start saving for college?
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
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.
This hypothetical illustration assumes an annual 6% return. This illustration does not represent any particular investment nor does it account for inflation or taxes.
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.
… 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.
If you choose an account that gives you tax benefits—whether it's immediate tax deductions or tax-free withdrawals—you'll be in an even better position.
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.
The clock is ticking!
Ready to get started? There's no time like the present!
Where does college fit into your priorities?
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For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Vanguard Marketing Corporation serves as distributor for some 529 plans.
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