College Investment Plans | Redstone Federal Credit Union

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Your College Saving Strategy

We strongly recommend that you consider pre-funding the cost of college by following these steps:

  • Determine the amount of money you want to have saved by the time your child is ready to start college. This is determined by what you can afford, how much of the total college cost you want to fund, or both.
  • Determine the monthly investment needed to complete the pre-funding program.
  • Invest this monthly amount in an appropriate investment vehicle
  • Don't stop making the monthly investment until the last tuition payment is made sometime in the senior year of college.

This pre-funding strategy spreads the cost of college over a long period of time instead of waiting until the child begins college and incurring the cost over an intensive four-year period. This strategy helps you maintain your lifestyle in light of the college costs that are expected. It also enables you to benefit from the growth of your capital offered by a long-term investment program.

Start as early as you can

Let’s say you just brought the baby home from the hospital and you decide to start a monthly investment program to fund four years of college costs at $30,000 per year (in today's dollars). You'll need to save $585 per month through your child's senior year in college to pay the $120,000 cost (this assumes a 5% inflation rate and a 7% investment earnings rate).

Suppose your child is ten years old and you haven't saved anything yet... now you'll need to save $984 per month to fund the $120,000.

If your child starts college in one year and you haven't done any pre-funding, you'll need to save at least $2,175 per month through their senior year of college to fund the $120,000 for the four years. That's more than double what you would have needed if you started saving when your child was ten. That's why we recommend you begin a monthly funding program as early as possible.

Starting a college investment program when your child is 16 or older does not give you the benefit of long-term growth. Any college-funding investment program should be started when your child is young and should have a long-term focus. Your investment objective should be for growth in an effort to stay ahead of inflation.

Think ahead, plan backward

Any investment program needs to consider rate of return, risk, and when you will need the money. For college investing, when your child is young, you have a long-term investment horizon. When your child is 16 and getting close to going to school (you will need the money soon to pay tuition), you need to reduce your investment risk and move your investments to cash or other short-term investments.

This is not much different from saving for retirement—or saving for a house. The process is the same. What is your goal? How much do you have to work with? When will you need the money? Remember to always focus on when you will need the money; that will help you decide which investment vehicles to consider.

Develop a specific action plan for your college investment program. Remember to:

  • Determine how much you need to invest or how much you can afford to invest on a monthly basis.
  • Think about your willingness to invest in growth investments. This may be one good way to keep your investment rate of return ahead of inflation.

Whatever investment vehicle you select, invest regularly—monthly or quarterly. Most companies let you set up an automatic monthly investment program in which a fixed dollar amount is transferred from your bank account into the investment.

RFCU® does not provide tax advice. Please consult your tax advisor for your specific questions.

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