A: If you have the money, the best time to start is today.
Saving for your child’s college education can be a daunting task if you only focus on the overall costs for either a public or private school. While most parents think their children will attend college, research shows that only one-third expect to be prepared to pay for their education. Perhaps it’s because most people are overwhelmed with the price tag and think they can’t save enough—so they don’t try. However, if you start early and are disciplined in your investment approach, you may reach your goal by saving even small amounts regularly over the long term.
According to the U.S. Census Bureau, people with a bachelor’s degree earn, on average, over eighty percent more than those with just a high school diploma. This can mean a difference of $1,000,000 in potential earning power over the course of a career. So when you start saving for your child’s college education, remember that it’s actually an investment in their future.
There are specific Qualified Tuition Programs (529s), Coverdell Education Savings Accounts (ESAs), Uniform Gifts to Minors Act (UGMA) Accounts, and Uniform Transfers to Minors Act (UTMA) Accounts, that offer some tax advantages. Many investors also use IRAs and regular savings accounts to save for education. There are several considerations when deciding what type of account is best for you. There are many good websites that explain account types in detail and I also recommend speaking with an investment or financial professional to review your options.
The Key to Saving for College
Regardless of the account type, the main point is to start as early as possible. Invest regularly, ideally at least monthly, with fixed amounts of money so that your child's college fund can continue to grow and compound over time—this is called dollar-cost averaging (DCA). DCA is a long-term investment strategy that involves investing a fixed dollar amount into a particular investment or portfolio at regular intervals. Since you always invest the same amount, you will purchase more shares when the price is low and fewer shares when the price is high.
Instead of investing lump sums, the idea is to average out the highs and lows to help you avoid market timing (trying to determine when is a good time to invest). It takes advantage of the cyclical nature of the market and allows you to focus on long-term growth and ignore short-term market conditions. While this technique does not eliminate the possibility of losing money on an investment, losses can be lessened during periods of declining stock prices and profits may be enhanced when share prices rise over time.
DCA is a plan of continuous investment in stocks regardless of their inconsistent prices. Of course, you must consider your financial ability to continually purchase shares. Additionally, I only recommend DCA when you are not charged a transaction fee. As with all investment methods there is no performance guarantee, but DCA is a hassle-free approach.
Saving for College – A Real Life Success Story
Before education savings accounts were introduced to the investment world, I had the idea to show our shareholders how DCA could work for them—and me. Seven days after my daughter Anna was born on May 23, 1989, I opened a FAM Value Fund account for her with $2,000.
Subsequently, I collected loose change and dollar bills that were in my pocket each day and placed them in the cigar box that was originally filled with cigars to celebrate Anna’s birth. I was amazed that each month the amount I saved was about $100; so I added $100 to her account monthly and I did so for 18 years. Upon high school graduation in April 2007, Anna's account value had grown to $89,348.42 from the investment amount of $23,600! Anna's account was then used to help pay for college.
When speaking with others I underscore that regardless of whether it’s a Bull or Bear Market, the best time to invest in your child’s future is today. Remember, if you invest even small amounts methodically over the long term, you may save enough so that your most important asset, your child, is a step ahead.
Dollar-cost averaging is a plan of continuous investment in securities regardless of their inconsistent prices. Of course, you must consider your financial ability to continually purchase shares. As with all investment methods, there is no performance guarantee.
The writer is a Principal at Fenimore Asset Management in Cobleskill, NY. Fenimore Asset Management is an independent investment advisory firm located in Cobleskill since 1974. Fenimore’s affiliates are the Fenimore Private Client Group & FAM Funds – offering separately managed accounts and mutual funds. In-depth research. Insightful investing.