Bear Mountain Capital Inc.

College: How Much and When??

| September 30, 2013


My wife and I have a 5 year old. In fact, he just turned 5 this month. We also have a 3 year old (“3 and a half!”, he likes to say). We could not love them more.

No matter how much time we spend together, soaking in these precious years, I can’t get past how fast they grow up. It amazes me how quickly they go from newborns to almost-kindergarteners. Naturally, its hard to ignore how soon they’ll be teenagers and then off to college.

And although I advise clients on investment strategy and financial planning for a living, I have the same questions to answer regarding how I’m going to pay for their college tuition. Like most parents, I want my kids to have great opportunity. If we can help with college, we will. In fact, if we are going to make an honest attempt, we need to know how much to save and when to start??

As you can imagine, planning for college can get complicated, especially when you factor in things such as:
* Starting your savings plan later, when the child is 5, 10 or even 15?
* Will the child get scholarships, if so, how much to plan for?
* What impact will student aid have on our college expenses?
* How much will college expenses continue to increase over the coming years?

All of these questions are important, but to keep things easy, consider a simple breakdown for average yearly costs of three types of schools, in-state, out-of-state and private:
1. “In-state” yearly tuition: $20,500 approx.; if you were to start saving the day you brought your child home from the hospital, expect to put away $300/mo away a year for that one child’s college tuition. This equates to $3,600 a year.
2. “Out-of-state” yearly tuition: $32,500 approx.; again, if you start saving at the very beginning, expect to save $500/mo or $6,000 a year for future tuition expenses.
3. “Private” yearly tuition: $40,500 approx.; to meet these needs, you must save a little over $600/mo or $7,200 a year.

To be sure, these are conservative numbers. They assume only a 4% rate of inflation, when college expenses have been going up at a much faster rate over the last several years. In addition, they assume you are saving AND investing the money at a 7% annual rate of return. If you plan on saving, but not investing these funds, the monthly savings requirement more than doubles. In other words, it would require you to save at least twice as much money annually to meet the rising costs of college.

The point here is to remember that time will pass quickly. Putting a monthly savings plan in place right now is the best way to ensure you are doing what you can. Starting early, even with a smaller amount of $25 to $50, will go a long way. It is important, because the time goes by fast. Very fast.