How to start saving money for a child’s education?
Studies estimate college fees to be close to $100,000 for four years (varies depending on university and course), and we expect these costs to become even higher in the future.
The first step would be to figure out whether you have enough savings and assets to enroll your child in an institute of their choice. If not, you would have to figure out how much you need to save. US universities never expect the parents of a child to cover the entire course fee as a small portion of the cost is covered by financial aid in the form of grants, scholarships, loans, etc.
Studies show that a household would have to save close to an equivalent of $3000 per annum from birth to have enough savings for college. If the child is any older, then a corpus of the child’s current age multiplied by $3000 needs to be set in place.
Suppose you need to enroll your child into a university at the age of 18, which costs roughly $100,000 (tuition plus related expenses) for a 4-year course. Taking the annual inflation rate into account, the course fees (which was worth $100,000 in 2002) would have increased to $144,446.27 in 2020 (18 years). Investing $3000 annually from the birth of the child until the child turns 18 will fetch returns close to $121338.79 in 2020. These returns earned can easily cover more than 75% of the college fees in this case, and you can make the most of financial aid to cover the remaining 25% of the costs.
An alternative way of planning your savings would be to calculate the college fees taking inflation into account and working backward from that amount. Let’s use the same figures as above. A $ 100,000-course fee would sum up to $$144,446.27 in 18 years. Let us assume that you can cover 75% of the post-inflation-adjusted college fees. In that case, you would have an investment goal of $108334. Now, in order to calculate your annual savings, you would have to set a CAGR (compound annual growth rate of 8% in this example) and a tenure (let us assume 18 years again in this case). While calculating backward, we get an annual contribution figure of $2688 for a period of 18 years at an 8% rate of return.