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Saving for college

It's been on your mind: you really need to start a college fund for your child. But the dollars are so tight, you keep putting it off. Author Carla Mooney explains why it's important to start saving early, and provides advice on how to do it.

Tuition sticker shock
Do you have an extra $214 to $460 in your monthly budget for the next 17 years? Along with a 9% annual investment return, that's what it will take to save for your child's college education. Assuming college tuition will rise at an annual rate of 5%, you can expect the average four-year college bill to soar to roughly $103,000 at public colleges and $222,000 at private colleges by the year 2018. But before these projections cause you to break out in a cold sweat, here are several tips that you can follow to make the most of your savings strategy.

Tip #1 -- Start saving early
Never underestimate the value of starting your savings program early. Beginning on your child's first birthday, $100 invested monthly with a 9% return will grow to $48,251 in 17 years. That same $100 monthly investment, started at age five, will grow to only $29,660 by the time your child reaches age 18.

Consequently, a delay of four years ends up costing you $18,591. Therefore, any amount that you can put aside now, no matter how small, reaps the benefit of time to earn interest and grow. You can start small and gradually increase the savings amount as your income grows. To help you regularly put money aside each month, automatic savings plans are a good option.

Many companies enable employees to have a small amount deducted from each paycheck and invested in bond or mutual funds. Alternatively, you can direct automatic withdrawals from your bank account to be invested on a regular basis.

Tip #2 -- Invest in the stock market
Historically, stock returns have outpaced both bond returns and traditional savings accounts interest over a long-term period. These higher returns do come with a price as market volatility makes stocks riskier short-term investments. Nonetheless, these risks should smooth out over the years before your child reaches college age.

If you don't have the time or expertise to build your own portfolio, a stock mutual fund is the easiest way to invest in stocks. Stock mutual funds provide a professionally managed, diversified portfolio. In addition, mutual fund shares are convenient to buy and sell, allowing easy access to your money in the event of an emergency.

Tip #3 -- Don't sacrifice retirement savings
Retirement savings deserve a top priority in your family budget, even over college savings goals. Many financial experts recommend that you approach saving for college like saving for any other large purchase.

Make sure you fund your retirement strategy first, and then address college savings goals. To bridge any gaps in your child's college fund, there are many additional sources to finance a college education, including scholarships, financial aid, and loans.

Tip #4 -- Maximize your 401(k) contributions
Many companies match an employee's 401(k) contribution as long as it meets a designated minimum threshold. Make sure you contribute enough to your plan to ensure you receive this money. In the event of an emergency withdrawal of funds, the employer's match invested in your account should exceed any early withdrawal penalties.

Tip #5 -- Pay-off credit card debt
Credit card interest rates are high, and interest payments add up quickly. By paying off your credit card balances now and eliminating this interest payment, you effectively earn 15% or more on your money.

Tip #6 -- Consider your child's age
Investing in traditional savings accounts, certificates of deposit, or bond funds while your child is young can jeopardize your overall savings plan. The low returns of these safer investments generally will not generate the growth that you need in a college portfolio. For children younger than 14, growth stocks and mutual funds provide the greatest investment return over time.

However, when your child reaches age 14, consider switching some of your stock portfolio into lower risk vehicles. This strategy protects you from any negative stock market swings just before the tuition check is due.

Tip #7 -- Beware of late maturing bonds
Bond investments offer a guaranteed return. This guarantee, however, won't be there if you have to sell your bond investments early in order to make a tuition payment. Carefully consider bond maturity dates in order to avoid maturity after the tuition bill due date.

Tip # 8 -- Avoid life insurance policies and tax-deferred annuities
Finally, life insurance policies carry high premiums and cancellation penalties. Similarly, agent commissions and early withdrawal penalties burden tax deferred annuities. These expenses and penalties reduce your investment earnings, making them an expensive savings choice.

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