Hosein Sarrafan, a branch manager at City National Bank, remembers setting up his eldest child's college fund before she turned 2.
He started early because he knew that university tuition would be expensive and he wanted to prepare as soon as possible.
“College seems to get more expensive every year, and so parents have a right to worry," said Sarrafan. “But for me, the best thing to do was to plan for it as early as I could."
According to data from The College Board, 18 years from now in 2036, four years of public, in-state college costs will average more than $180,000 and private nonprofit college would average $396,166. That's calculated by taking average 2018-19 tuition, fees, room and board and adding a 4 percent annual increase (which has been typical for the past decade).
Of course, numbers will fluctuate based on the university, its financial aid packages and institutional grants, as well as with other factors, such as living arrangements and textbook costs. Also, in order to put your child through college, the amount you need to save will vary depending on when you start saving as well as how much you plan to cover.
A popular guideline involves saving a third of the projected cost, paying a third from income while they're attending and taking loans for the remaining third — or variations of that percentage.
Click the image below to view an infographic that breaks down what you'll need to save each month for 4-year public or private college.
Experts agree that starting early is the most important college savings advice, as roughly one third of your eventual total will be generated from investment earnings, according to these projections. If you start saving when your child is in high school, by contrast, only 10 percent will come from earnings.
“The best solution is to start early, and to put away as much as you can," Sarrafan said. “Of course, everyone's situations will be different, but if you can start saving now, even just a little, then do so."
Another note: These are the costs for one child, so if you have or plan on having more than one, you'll need to account for that when planning your savings.
Once you've decided when you'll start saving and how much you need to save, the next steps is figuring out your approach to reaching your goals.
“Because every family's assets are so individualized, the best advice I can give is to do your research," Sarrafan advised. “It's difficult to put a hard number on what you should save, but start with what you can afford."
As with planning for any large purchase, the first step is crunching some numbers. Begin by listing how much your monthly living expenses are, including fixed costs such as your mortgage or rent, health insurance, car payment and taxes.
“Obviously, you have to meet your basic living expenses before you can save for the future," Sarrafan said. “We usually tell clients that 30 to 40 percent of their income should go to their living expenses. And then from there, you can figure out how much you have left over to save."
Once you have an idea of the money you need to spend each month to get by, then you can decide on a monthly college savings number.
It can be as little as $300 a month for a toddler, up to $1,000 a month for an older child, depending, of course, on your income and investments, he said. At best, this number should amount to about 10 percent of your discretionary income.
“This number also shouldn't take away from your emergency fund, or your retirement savings," Sarrafan noted. “Consider it as its own, separate nest egg. The most important thing to remember, though, is once you make a commitment to a number that works best for you, that you stick to it. It should be a monthly, automated amount."
“There is more than one way to save for college," Sarrafan adds. “The beauty in this is that you can take advantage of as many methods as you want."
These savings plans fall into two categories: prepaid tuition plans and education savings plans.
The prepaid plans allows parents to buy units or credits at participating colleges or universities — which are usually public, in-state schools — and are sponsored by state governments.
The education savings plans stipulate that all the funds in the account will eventually be used for higher education, and can be used at any school. The money must be used for educational purposes, such as tuition, college-related fees, and college living expenses, otherwise there will be penalties.
One education savings plan option, Sarrafan suggested, is opening and regularly contributing to a 529 savings plan*.
“529 plans are tax-free, so that money can grow over time," he said. “The more time you allow for this money to grow, the better off you'll be."
Other options that well-off parents may want to explore are life insurance policies or even real estate investments. “Let's say that you buy an investment property near a university you hope your child attends one day," he proposed.
“Throughout their childhood, you charge rent on this place. And then when your kid goes to college, they not only have somewhere to live, but that property helped you with their tuition."
Of course, if you're a parent with an older child, you might not have as much time as you'd like to save.
Still, Sarrafan is confident that all hope isn't lost. “I'm a big believer in community college, as well as in kids taking more than four years to finish school," he notes. “In these cases, you also have the option of saving up as your child figures out what they want to do — and there's nothing wrong with this path, either."
At this point, Sarrafan understands that you might be tempted to do what many parents do when looking for answers regarding their kids: Consult the internet, or talk to friends. But he argues that those two solutions aren't enough—and for good reason.
“Google makes it easy to find answers on everything, but as is the case with going to the doctor or finding a lawyer even after reading up on something, you still need to speak with a financial advisor after doing that initial internet research," he noted. “Someone with experience in financial planning can tailor a savings plan to your specific needs."
A financial advisor can prepare you with benchmarks that are in line with your living expenses and budgetary constraints, as well as your child's potential career path. For instance, a child who wants to become an accountant or physician will need more than four years of schooling to reach their career goals.
“Talk to someone you trust, have them look at the whole picture and allow them to make personalized recommendations for you," Sarrafan suggested.
The bottom line, though, is to start planning now for whatever future you envision for your child.
City National Bank's relationship managers can help you create a plan for your children. To learn more, contact us.
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