Saving for Your Baby’s College: Building Habit Early is Key

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By Young Boozer, Treasurer, State of Alabama

From my own experience – and those of countless others – it goes without saying that having a child is something for which you can never truly prepare. No matter how many books you read, how many other parents you consult or how much you think you’re ready for it, a baby changes everything.

These new arrivals to our families make us reevaluate our priorities, such as time, work/home life balance and, especially, our finances. All of a sudden, nice dinners out with friends or new seasonal clothes take a back seat to diapers, bottles, formula and any other needs this little, helpless human might have.

Given all of the immediate needs of a child, it is often times forgotten what this same child will need in the long term. When you’re looking at the face of a newborn, it is extremely difficult to make decisions for that same child 18 years into the future. But it is wise to do so.

Higher Education Costs are on the Rise
According to the 2013 College Board – Trends in College Pricing Report, national average costs for one year at a public, four-year, in-state institution (tuition, fees and room & board) has increased to $18,390 annually. There is no denying that children born now will face higher costs per year in another 18 years.

In light of rising college costs, it is imperative that new parents – as early as they possibly can – begin to save for this potentially hefty future expense.

Many expecting or new parents will argue that there is too much at the onset of a new family to focus on something as far off as college. However, doing so provides you and your child with as much time as possible to see your investment grow to its fullest potential.

Form a Habit, No Matter the Amount
An expectant or new parent should keep in mind only one mantra when considering college savings: “start early and save often.” In other words, the first step is to properly establish and make an initial investment in a college savings account. Step two is to make regular investments to increase your future return.

Pay little attention to how much money you are investing at the onset, as this is not the most important factor. Instead, make a habit of investing, whether it’s $20, $50, $100 or more each month. Get used to having that amount of predetermined money go straight from your paycheck into your child’s college savings. If you cannot do this right at birth, then plan to do so before his or her first birthday to maximize the time and potential earnings your savings will acquire.

As you move forward in life and build greater means, you can reassess increasing your regular investments based on reprioritization – and availability – of funds.

The Wonder of Compound Interest
Many new parents are overwhelmed – which is an understandable feeling that many of us have felt in the past. It is important, however, to consider how those same feelings might arise when it comes time for a child – or multiple children – to head to college. Investing early could alleviate this potential future stress with just a little at a time, thanks to compound interest.

My father used to say that compound interest is the eighth wonder of the world. For college savings investors, while you’re enjoying the “wonder years,” you will also be enjoying the wonder of compound interest. And in 18 years, you will be pleased at how your bit-by-bit contributions have grown into a considerable lump sum. As a result, you will discover your college savings were not an expense, but on the other hand, an investment in your child, the next generation.

Here in Alabama, our CollegeCounts 529 program offers a number of investment options in which new parents can contribute early and often – and see their savings grow over time. What’s most important is to consciously decide to create an account and then invest often … from as near your child’s birth as possible. Doing so will account for fluctuations in the market over time, resulting in a consistent investment that will help alleviate the rising costs of higher education – no matter how far in the future these costs might be.