Parents should begin rescue money early for their children's college instruction because of the high costs and expectations that parents will pay part of the costs associated with the education. Several stock mutual funds are recommended.
Here's a request that's as pleasant to think as a fraternity hazing: How will you come up with the money to send your child to the campus of his or her choice? If you're like most Americans, your talk is probably loans--unless you start rescue and investing more effectively. Agreeing to a new Money poll, fully 87% of U.S. Moms and dads expect their kids to go to college. But nearly half of them, 47%, have not yet stashed away any money to cover the costs, which currently run an mean of ,118 a year for tuition, fees, room and board at four-year social schools and ,184 at underground universities, Agreeing to the College Board. And at the current growth rate of 5% a year, the cost of a four-year degree is projected to rise to ,834 (public) and 8,620 (private) for a child born in 1997.
The seek of 1,118 adults with children, conducted by Icr of Media, Pa. (margin of error: plus or minus 2.9 division points), also provides a wake-up call for parents who say they are rescue for their kids' college costs. More than half stash their savings in unwise college investments, such as certificates of deposit. And nearly a quarter of parents who are rescue are putting away a paltry 0 or less a year for each child.
Yes, your child can lessen your burden by working part time and by pursuing scholarships (see "Strategies That Can Cut Costs 30% or More" on page 126). But financial experts say that the mean parent should be prepared to pick up at least a third of total college costs.
If your child is in high school and you haven't saved enough, check out our guidance on page 138 on borrowing for college. If your children are younger, however, the sooner you start to save, the better. For example, Richard and Deborah Winters of Milford, Conn. (pictured at left) began putting away col- lege money for son Kyle, 4, when he was six months old and for daughter Kar- lie, 2, when she was 1 1/2. Oakland registered nurse Iris Winn (pictured on page 139), a late starter, now stashes a whopping ,000 of her ,000 yearly wage into college savings for her daughter Monique, 15.
But whenever you start your savings regimen, you can maximize your dollars by planning and investing wisely. Later in this article, we suggest venture strategies for families with college-bound children. But before you get to the definite advice, study these basic rules--the dos and don'ts of smart invest- ing for college:
--Do set house goals. You must first figure out how much you need to carve out of today's spending for tomorrow's college costs. To do this, you can use the savings calculators included in favorite software such as Quicken, online services like Money's college savings calculator ([http://www.pathfinder] .com/cgi-bin/Money/collsave.cgi) or free worksheets offered by brokerages and mutual fund companies, along with Charles Schwab (800-435-4000) and Fidelity (800-544-8888).
"Parents and children should work together to make sure they are focused on the same goal," says James Pearman of Fee-Only Financial Planning in Roanoke. "That way, you can face tough questions early on--for example, what to do if you are planning to pay for 75% of tuition at an in-state social school and your child wants to go to Harvard."
--Do start rescue early. Every year, as your venture primary grows, so do the earnings on your money. The part is simple: Don't put off investing.
--Do spend in stock mutual funds. Agreeing to the Money poll, parents rescue for college have plowed 53% of their instruction investments into low-risk--but low-interest--Cds and savings accounts at banks and money-market mutual funds. The parents have invested only 23% of their money in stocks and stock funds. That's a serious mistake. While stocks carry some risk, they are your best bet for development your money grow over five years or more.
Since 1926, stocks have gained an mean of about 11% a year, more than any other type of investment. Moreover, you can't count on bank account and Cd yields to keep pace with tuition hikes.
The safest, easiest and most disciplined way to spend in equities is through mutual funds. Not only do funds offer diversification but many will also waive initial venture minimums if you make automatic deposits every month, typically as minute as or 0. To avoid having any money siphoned off in commissions, stick with no-load funds like the ones we name in this article.
--Don't neglect rescue for retirement. Planning for your child's instruction should not sidetrack you from development quarterly contributions to your own 401(k), Ira or similar tax-deferred withdrawal account. You simply don't want to miss the chance to make the most of the tax-deferred gains ready in such accounts. And withdrawal assets won't work on your eligibility for federal need-based college financial aid.
--Don't spend in esoterica. From time to time, you may encounter sales pitches encouraging you to save for college with investments such as annuities or cash-value life insurance. Both defer taxes on your venture earnings but at the price of precious withdrawal rules. Many deferred annuities, for example, fee penalties of 7% or more if you need to take out money within seven years of development your investment. Tempted to buy zero-coupon Treasury bonds, which recently yielded 6.6%? They can be fine investments--as long as you buy ones that will be redeemed when you need the money. If you have to sell a zero before maturity, you may lose primary if interest rates have risen since you bought it. Prepaid-tuition plans, another way of construction up college savings, can make sense if you're too nervous to spend in stocks (see the box opposite).
--Don't put your money in your child's name if you hope to get financial aid. College financial aid formulas ordinarily wish a child to lead 35% of his or her assets toward costs, but parents typically need to put up no more than 5.6% of their savings.
With those basic dos and don'ts at the heart of your venture strategy, here are moves to make, based on your kid's age:
If your child is 13 or younger, you have adequate time to weather any short-term stock shop squalls. venture strategists therefore suggest that you put 75% to 100% of your college savings in stock funds, depending on how much risk you can tolerate, and the rest in such fixed-income investments as bonds and bond mutual funds. You might start your savings agenda with a fund that holds shares of large and mid-size associates with consistent earnings gains and strong growth potential. Financial planner Michael Zabalaoui at resource management in Metairie, La. Suggests Oakmark (up an mean of 25.13% annually for the three years that ended June 30; 800-625-6275). Pearman recommends Vanguard Index Value (up 25.46%; 800-851-4999). Both funds seek out undervalued equities and bear below-average risk, Agreeing to fund ranker Morningstar.
After you have accumulated ,000 in your starter portfolio, you can move as much as a third of your holdings into small-company and international stock funds, which offer the hope of juicier returns but also carry greater risk. For funds specializing in shares of small companies, Zabalaoui favors Berger Small Cap Value (up 22.6%; 800-333-1001). Among international funds, he likes Janus Worldwide (up 24.7%; 800-525-8983).
If your child is 14 or older, cut risk to safeguard savings. Zabalaoui recommends getting at least 50% of your money out of stocks by the end of your child's freshman year and bright all of your college savings for that child into short-term bonds, fixed earnings and cash by the end of her sophomore year. To keep risk low, most venture experts prescribe short- and inter- mediate-term bond funds, which will add more pop to your total return than Cds or U.S. Savings Bonds. Pearman likes Vanguard Bond Index Intermediate-Term (up 8.62%; 800-851-4999). The fund shuns high-risk bonds and has an highly low yearly price ratio of about 0.2% of principal, enabling more savings to go toward your child's college costs.
Dos and Don'ts: trainee loans