How can I save for my kids college tuition? I know – I know – with the soaring tuition fees across the world, the just the idea of it hurts.
But with the huge wage gap between qualified workers and the rest of the population not letting up, and with technology disrupting the jobs industry college planning is essential.
We’ve discussed the costs in the US, UK and Australia, done some college tuition savings calculations and gone over the basic strategies for college savings here.
As a recap, the two most important points are:
- Start early and plan. Start a children’s education plan and college fund as soon as possible – when your child is born, even. Yes – it’s advisable to actually put together a child education plan, on a spreadsheet, just like a company does for major investments. Understand how big you need your college fund to be when your children graduate from school, and from that calculate exactly how much you need to save per month. This college planning and saving is important for many reasons. First, you’ll have to put away less each month over a longer time, so it’s less painful. Second, your savings compound for longer – you put your money to work for you. Third, you can afford to take on a little more risk in exchange for higher long-term return, making your college fund go even further.
- Invest your funds appropriately. If you start early, as mentioned above, you have a long investment horizon and can afford to make slightly riskier investments. A 10 to 20-year horizon is quite appropriate for investing your funds.
Where should I invest?
As we’ve said before, you should always have some diversification between asset classes. You could put your funds somewhere between 50 and 75% in stocks, but do have some funds in bonds or real estate. Just imagine if your kids were going to Harvard in 2008, and you had to dump $60,000 of your shares in one go at the worst possible time – yikes!
Now, as far as stock indices go, the S&P500 is the world’s largest stock market and quite diversified – 500 is an awful lot of names. Those companies cover all sorts of sectors, and do business all over the world. So some people do in fact put all their stock allocation in the S&P. But you should diversify and look at European or Asian stocks in case the US market happens to underperform.
- Active or passive? There are lots of different ways to invest in the S&P 500. One thing you can do is buy an ETF or passive fund that will have shares in all the companies according to the weights in the index. They charge very low management fees, but they don’t have managers who actively try to choose good investments for you.
On the other hand, you can go with active managers. They charge more, but have teams working hard to analyse companies’ finances and trade stocks in an attempt to earn you a better return. Both approaches are valid and which one you choose really depends on your personal preference. But if you do go for an active manager, it’s then important to make sure you invest with a good one – a large number underperform the passive funds, once you take their fees into account.
Specifically, in the case of the S&P 500, some specialists argue that because they are some of the most actively monitored and traded stocks in the world, the market price is most likely to be fair. In other words, it will be hardest to beat the market with an active manager, and the case for a passive fund is strong.
- Integrate your college planning to your overall financial planning. It’s very common, especially in the US, to have a separate fund or account for saving for college. And that can be appropriate if you need it to discipline yourself to save. But in practice, you should consider the strategies for your college fund within the context of your entire personal financial plan and investment portfolio.
For example, it doesn’t make sense to set aside a college fund aggressively weighted towards stocks while at the same time leaving excessive funds in low yielding savings accounts, does it? So consider discussing your overall financial situation, as well as your college planning, with a trusted professional financial advisor. They will be able to put together a comprehensive plan and help you stay on track.
With careful college planning and professional advice you’ll be comfortably seeing your kids off to university. Good luck!