Saving for college

Putting away even a small amount of money for college now can make a difference in helping to build your savings and offset college costs.

By saving for college as early as possible, you will allow yourself to:

• Start with smaller or more convenient amounts
• Increase your money's growth with compounded interest
• Reduce or eliminate the need to borrow

College savings over time

If you start saving when your child is born, here's how much you'll have by the time they're 17. Assumes a 7% return on investment.

Saving for college is about paying yourself first. When looking at your regular savings goals, consider adding saving for your own education or for the future college student in your life.

To make college savings more convenient, consider using automatic transfers with every paycheck to simply transfer money to the account holding your education dollars. Automatic transfers are a great way to safely and conveniently build the funds for education or any other financial goal.

“Putting away even a small amount now can make a difference to help offset college costs. ”

In your online banking settings, you might consider creating a nickname for the account with the name of your child, children, or grandchildren. This serves as a helpful way to organize your online banking, as well provide a regular reminder of what you are saving for and for whom.

If you’re a parent wondering how to save for college, consider having your child also save a portion of their allowance for college, which can be done even from an early age. This can help set expectations with the child that they are also a part of funding their future education.

There are a number of options with financial benefits to help accumulate your education dollars, such as 529 plans, Education Savings Accounts, or savings and certificate of deposit accounts. Certain accounts, like 529 plans and Education Savings Accounts, have eligibility and contribution limits, so a financial professional can help determine if they are an option for you and explain the fees and benefits.

No matter the path you choose, saving for college now will help to fund educational opportunities in the future.

How much will my other college expenses cost?

When it comes to figuring out how much college will cost, tuition is just the beginning. Carefully managing expenses and planning out ways to pay for them can reduce the likelihood of overspending and accumulating unnecessary debt. Here are a few steps you can take to help you afford these additional college expenses.

Step 1: Break down your primary expenses.

• Room and board (average annual cost $9,047): dorm or apartment costs, water, electricity/gas, cable, Internet, phone, groceries, snacks, and eating out1 
• Books and supplies (average annual cost $1,137): books, school supplies, lab fees, and computer
• Personal expenses (average annual cost $1,989): clothing, laundry, toiletries, haircuts, and entertainment costs2
• Transportation (average annual cost $1,073): vehicle fees, parking, gas, maintenance, and travel costs
• Miscellaneous: insurance premiums; monthly cell phone bills; or health expenses not covered by insurance, such as office visits, treatment, and prescriptions

To help validate these costs, consider checking the college’s website for content and tools, which will help give you a better sense of the actual costs at the school.

Step 2: Identify areas where you can cut back or earn incremental funds.

• Evaluate if it’s less expensive to live in a dorm or off campus. It might be possible to share housing with other students to split the housing costs and potentially food costs among more people.
• Purchase used books or take advantage of your school or other book rental programs, if available.
• Walk, bike, or use public transportation rather than driving a car, thus reducing your gas and parking expenses.
• Take advantage of student discounts on meals at restaurants, movie tickets, or transportation with your student ID card.
• Consider limiting the number of times you go out to eat.
• Avoid unnecessary expenses, such as library late fees and parking fines.
• Plan your courses carefully. Returning to school for an additional semester to get that one last required course is expensive.
• Work study, on campus jobs, or a part-time job are examples of possible ways to offset some of those incremental expenses.

Step 3: Create a budget.

Once you have a good idea of how much college will cost, creating and sticking to an actual budget for yourself can help you live within your means. A cash flow worksheet can help provide an account of where you’re spending your money (rent, books, gas) and where you’re earning money (part-time job, work-study, savings). If you’re spending less than you’re earning, you’re in great shape. However, if your expenses exceed your income, it would be wise to look at where you could cut back, or how you could bring more money in.

If you’re starting out as a new student, college may be the first time you’ll be solely responsible for your regular budget. By going in with a plan, you can better prepare yourself to handle this new responsibility.

How can I pay for college?

Your college education can be one of the biggest expenses of your life, as well as one of the most rewarding experiences. After assessing how much you and your family can contribute, you might determine that you need additional money for college. Consider the following options to help you pay for college and learn how to get scholarships, grants or student loans.

Apply for scholarships and grants

Getting scholarships or grants for college is a great option for students preparing for college because you don’t need to pay them back after graduation. These resources are popular among students, with 89 percent of students at private universities getting scholarships or grants in 2013.1 The government, your college, or a local organization can offer you a scholarship, while the government alone can determine your eligibility to get grants for college based on your Free Application for Federal Student Aid (FAFSA). You’ll need to complete a FAFSA form if you plan on applying for grants, federal student loans, or federal work-study.

“Create a spending plan to help you repay your loans as quickly as you can. ”

Apply for loans

Many students rely on loans to help fund their education. This can be a good way to get the funds you need, but be sure to understand what you’re signing up for. There are primarily two types of loans: those issued by the Federal Government and those issued by private lenders like banks and other financial institutions. There are several types of government loans that differ based on who qualifies, what they cover, and how they charge interest.

• Federal subsidized loans are awarded based on financial need, and recipients are not charged interest until the loan enters repayment. The government subsidizes the interest on the loan while the student is in school and during most deferments. Federal unsubsidized loans start accruing interest as soon as the funds are disbursed. Borrowers will be responsible for paying all accrued interest. Federal loans generally are not awarded based on the credit of the borrower.
• Private loans differ based on the financial institution that issues the loan. Private loans most often look at the creditworthiness of the borrower. The rates are different than Federal loans, so you should do your research. A cosigner, who is equally responsible for the private loan, is often required and may help you qualify for a lower interest rate. 

For the 2014-2015 academic year, 25 percent of students borrowed federal student loans to pay for college, while 5 percent borrowed both federal and private student loans, and 2 percent borrowed only private student loans.2 When taking out loans, remember to:

• Review your loan’s interest rates, conditions and repayment terms
• Only take out as much money as you need
• Create a plan to help you repay your loans as quickly as you can, even paying interest while you are in school, if possible.

Consider work-study

If you're interested in earning money for college while in school, working part-time and considering a work-study program is a great option. Federal Work-Study (FWS) programs let you earn money from a community service position or a job related to your field of study, with the funds going toward educational expenses. Work-study jobs usually require you to work 12-20 hours per week, and the pay starts at minimum wage 3 with some positions earning higher amounts.

To help determine your funding needs, consider using an online calculator to assess your situation. College is expensive but understanding the process for getting scholarships grants and loans can help you pay for your education.

Why consider investing?

Investing early on is a forward-thinking way to grow your money and meet your financial goals. Consider these three ways your money can work for you:

1. Keeping ahead of inflation

A key reason to invest is to keep your nest egg growth faster than rising inflation rates. Based on the Consumer Price Index (CPI), inflation rates reflect the rising costs of basic needs, such as food and clothing. Consider this: $20 in 1980 had the same buying power that $55.70 has today. 1 If you invest, you’re more likely to grow your savings at a similar or higher rate – making it easier for you to afford your expenses when you retire. 

“A key reason to invest is to stay ahead of rising inflation.”

2. Compounding growth

When you select an investment with compounding interest, your earnings take on a cumulative effect. With compound interest, the interest accrues on both the principal and the previously accumulated interest – as opposed to simple interest, where only the principal earns interest. To learn how to calculate compound interest, imagine you’ve invested $1,000 for a year at a five percent rate. You would make $50 in that first year. But in the second year, you’d multiply $1,050 by 1.05 to get the new total, $1,102.50. With compounding interest, each year more interest accrues than in the previous year. The longer it stays invested, the more its value will grow.

3. Free money

Forty-one percent of employees contribute to a 401(k) or savings plan in which their employer matches their contributions. 2   For example, if your employer matches up to 6 percent, that means that for every dollar you contribute to the plan up to 6 percent of your earnings, the employer will contribute to the plan as well. So, if you don’t make that 6 percent investment, you’re sacrificing free money.

Getting started with investing is easy. If you learn about the basic types of investments and find the right advisor, you can begin making smart financial choices for the future.

Investment types and terminology

How and where you invest your hard-earned money is an important decision. However, fully understanding your investments can require a crash course in terminology. The following definitions for a few key terms can help increase your understanding of the investment process and enable you to make better decisions:

Investment types

The most common terms that are related to different types of investments:

• Bond: A debt instrument, a bond is essentially a loan that you are giving to the government or an institution in exchange for a pre-set interest rate paid regularly for a specified term. The bond pays interest (a coupon payment) while it's active and expires on a specific date, at which point the total face value of the bond is paid to the investor. If you buy the bond when it is first issued, the face or par value you receive when the bond matures will be the amount of money you paid for it when you made the purchase. In this case, the return you receive from the bond is the coupon, or interest payment. If you purchase or sell a bond between the time it is issued and the time it matures, you may experience losses or gains on the price of the bond itself.
• Stock: A type of investment that gives you partial ownership of a publicly traded company.
• Mutual fund: An investment vehicle that allows you to invest your money in a professionally-managed portfolio of assets that, depending on the specific fund, could contain a variety of stocks, bonds, market-related indexes, and other investment opportunities.
• Money market account: A type of savings account that offers a competitive rate of interest (real rate) in exchange for larger-than-normal deposits.
• Exchange-Traded Fund (ETF): ETFs are funds – sometimes referred to as baskets or portfolios of securities – that trade like stocks on an exchange. When you purchase an ETF, you are purchasing shares of the overall fund rather than actual shares of the individual underlying investments.

Investment strategies

Once you have a better understanding of the investment choices available, you may come across specialized terms that explain how money can be invested:

• Allocation of investments: Also known as asset allocation, this term refers to the types of investments/asset categories you own and the percentage of each you have in your investment portfolio.
• Diversification: This is a risk management technique that mixes a wide variety of investments to potentially minimize your investment risk.
• Dollar cost averaging: An investment strategy used whereby an investor purchases fixed investment amounts at predetermined times, regardless of the price of the investment. This strategy minimizes risk because it reduces the difference between the initial investment and the current market value over a long enough timeline.

How to choose a financial advisor

Financial advisors are like tour guides: It’s their job to pinpoint where you want to go and help you get from point A to point B. Whether your destination is retirement, a college education, or your dream home, they can give you information, point out important milestones and landmarks, and help you decide what to do next. Here are a few tips for finding the financial advisor who is right for you:

Set expectations. Determine how closely you want your advisor to work with you . For example, if you’re interested in investing and don’t have the knowledge or experience to execute an investment plan yourself, you many need to consult a financial advisor on a more regular basis than a more experienced investor. Your advisor can help you with a range of decisions, from helping you determine your investment goals to dealing with the financial impact of divorce.

Look for credentials. Ask for references and/or conduct an interview with a potential advisor. Ask them about their education, work history, and services, as well as whether they’ll be working with you directly. You also may want to ask about and check their credentials.

“With a little time and research, you’ll be able to find the advisor who is right for you.”

Ask about fees. Some advisors receive a flat fee, an hourly rate, or a percentage of the yearly assets they manage. Others receive commissions on financial products they recommend. 

Find the right fit. The person you trust with your money should be someone you like, someone you trust, and someone who makes you feel comfortable. After all, it’s not just your finances at stake; it’s your future. 

There are a lot of great advisors out there. With a little time and research, you’ll be able to find the one who is right for you.

How to save on taxes

Investing your money is a great way to build your savings to prepare for the future. Still, there are many factors to take into account when making investments, such as the specific tax considerations of each investment vehicle. Here are some potential ways to save on taxes when making your investment decisions.

Determine how long you’ll hold the investments: Tax codes usually encourage long-term investments. So, if you try to sell your investment within the first year of owning it, you’ll pay ordinary tax rates, which could be 25 percent to 35 percent or more on that asset. That’s why it’s important to hold individual stocks for more than one year. Securities held for more than a year may be taxed at a lower, long-termcapital gains tax rate 1 . Remember, you’ll have to pay taxes on dividends, but otherwise you only pay taxes on the value of the stock if and when it’s sold for a profit.

“Consider the tax implications associated with different investments. ”

Consider where you keep your funds: Keeping your investments in the right place is vital to ensuring growth and reducing tax bills. Place your dividend-paying stocks into tax-advantaged accounts, such as an individual retirement account (IRA), Roth IRA, or 401(k). By regularly investing in your retirement account, you can reduce your taxable income and sustain tax-deferred growth. You’ll only pay tax on IRA and 401(k) accounts when you take the money out during retirement. For the Roth IRA, as long as you don’t withdraw the money until age 59½ and your contribution has been in the Roth IRA for five years, you don’t have to pay taxes when withdrawing the money you’ve invested. It may also be wise to consider placing funds with a high turnover ratio, or frequent trading, into your IRA or 401(k), since you can also defer paying those taxes until retirement.

If you choose to invest in a Roth IRA, keep in mind that contributions are taxed before the money is deposited in your account. On the positive side, your principal grows tax-free and you pay no further taxes upon withdrawal. This is especially advantageous if you think your taxes will rise in the future, since you're paying taxes now rather than later. Another advantage of the Roth IRA is that it has no required minimum distributions for the account owner, perhaps reducing your income tax liability during retirement.

Know how to handle losses: When investing, you have to accept the risk of taking a loss on one or more of your investments. If the loss can’t be recovered, many investors will sell investments and use the capital losses to offset capital gains and help reduce tax bills. If your net losses exceed your gains, you are only allowed to use a certain amount of capital losses to offset ordinary income each year.

Understanding the tax code for different investments will help you be strategic in your choices and help you reap the potential benefits. As always, consult with a tax advisor for guidance specific to your situation.

The pros and cons of selling investments

If you find yourself short on cash, you might be tempted to cash in on some of your investments. But before you make that decision, it can be helpful to weigh the pros and cons that come with liquidating each type of investment.

• Selling a certificate of deposit (CD) before it matures. CDs are locked-in for a set term. You may pay a penalty or forfeit your interest by selling a CD before its maturity date. If the interest rate is low and the loss of return isn’t great, this may be a viable option; however, it’s best to wait until the CD matures so you can reap the full reward.
• Selling a bond before it matures. If you purchased a bond when it is issued and hold it through to maturity you will typically receive the amount you paid for that bond plus the regular interest payments—or coupon payments—you receive over the life of the bond. If you sell the bond before it matures, you will lose the remainder of the coupon payments you would receive over the life of the bond, and you may either recoup or lose your money on your original investment depending on whether the bond has appreciated or lost value over the period since you purchased it.
• Selling a stock that has lost value. If you don’t feel positive about the stock’s prospects, you might be ready to access its current value. By selling it at a loss, you would realize a capital loss. It’s important to remember, however, that it could take up to three days for your funds from the sale of a stock to become available.
• Selling a stock that has gained in value. If you’re ready to take your gain, be prepared to pay a capital gains tax. Be aware of different taxation rates for long-term vs. short-term capital gains and losses. If it’s a short-term (12 months or less) investment, the tax rate will be higher than for a long-term (held longer than 12 months) investment. It helps to consult your tax advisor regarding tax-related investment decisions.
• Selling shares in a mutual fund. Selling shares in a mutual fund involves considerations similar to selling stocks. However, a fund-holder might not be aware of the capital gains or losses incurred by a fund manager. If so, the full tax implications might not be clear when you decide to sell. So, talk with your fund manager or financial advisor before you take action.
• Cashing out of a tax-deferred account . Generally, if you withdraw from an IRA or a 401(k) before you reach age 59½, you could face penalties and taxes. However, if certain conditions have been met, you can withdraw the principal amount you invest in a Roth IRA without penalty at any time. Tax-favored college accounts, such as a 529 plan, could lose their tax benefit if they are not used for educational purposes and you may face penalties.

It can be helpful to plan ahead for unexpected cash needs to avoid the fees and losses garnered from selling or withdrawing from investments early. Consider starting an emergency fund or applying for a low-interest line of credit to provide a buffer if you find yourself short on cash. If you plan early, you will be more likely to get the most from all of your investments.

When to consider changing investment strategies

If your investments aren’t yielding the returns you hoped they would, you might be tempted to sell them and reinvest elsewhere. If things are going well, you may want to cash out and move on to the next investment. While changing strategies can be a good idea, it’s better to base those decisions on analysis and in the context of your long-term investment plan rather than on speculation or instinct. So, before you make an impulse move, ask yourself the following questions:

• Have my financial needs/circumstances changed? When your financial goals change , so should your investment strategy. Likewise, you should re-evaluate your investment portfolio after significant life events, including when you’ve changed jobs, gotten a raise, had a child, or gotten married/divorced. Finally, consider your tax situation: If you’ve made gains on one investment, for example, there could be tax advantages to claiming losses on another.
• Has my investment horizon or risk tolerance changed? If your financial timeline changes – as it does, for example, when you near retirement – your investment strategy will almost certainly need a tweak. Changes in how much risk you are prepared to accept should likewise trigger changes in your investments. In general, the shorter your investment horizon (i.e., the sooner you need the money) the less risky you want your investments to be. If your horizon is longer than 10 years, relatively higher-risk investments that offer the potential for higher returns, such as stocks, may be a good idea. If your time horizon is between two to 10 years, a mix of stocks and more conservative investments such as bonds may be best; and if it’s less than two years, you may want to consider some income-generating investments along with investments that tend to be lower risk. No matter what your timeframe, it is beneficial to discuss with your financial advisor what the most suitable investment mix is for your particular situation.

“The shorter your investment horizon, the less risky you may want your investments to be.”

• Are my investments under performing? When you have a long investment horizon, a bad day, week, month, or even year may not be a cause for concern – though it’s always wise to talk to a financial advisor about the performance of your investment portfolio. Consistent poor performance over the course of several years, however, is often a legitimate concern. To form your own opinion you may want to establish a benchmark to compare similar investments.
• Are my investments outperforming? Apply a similar principle to investments that have performed extremely well. Talk to your financial advisor, determine why your investments are doing well, and decide what your next move should be. Try to avoid the temptation to make a quick profit, even if your stocks have gone up 100%, while still recognizing when a stock might be overvalued or when it might be time to trim the position. As a rule of thumb, unless there is a good reason to sell an investment, it may make sense to hold on to it for the long term, or at least for a period of five to 10 years 1 . 
  
• Have my funds changed? If you’re invested in a mutual fund, look for changes in the fund’s manager, size, and composition. Changes can be good, bad, or neutral. The key is making sure that the fund continues to offer exposure to the assets that it outlines in its prospectus and that holding it continues to make sense in relation to your overall investment portfolio and financial objectives.

The bottom line: Investments aren’t impulse purchases.  Before you change strategies, consider the pros and cons alongside your  present circumstances and future goals. When you do – and you still want  to buy or sell – you’ll know you’ve made an informed decision. 

What to consider at each stage of your life

As people age, their priorities change, and so should their investment strategy. Here are some key points to consider when rebalancing your investment portfolio at different points in your life: 1 

Age 25-35: You’ve graduated from college, landed your first real job, and maybe gotten married. Your goals might be paying off debt, saving for a down payment on a first home, establishing a college fund for your children, and/or putting away funds for retirement.

A good investment goal for this stage of life may be to put approximately 10 percent of your income toward retirement, and to potentially increase the amount you save whenever you receive a raise. You should take advantage of an employer-sponsored 401(k), or start an Individual Retirement Account (IRA). Even if you only put a small amount of money into these accounts, you’ll get in the habit of saving and may potentially benefit from compounded interest.

Age 35-55: These are peak earning years, when saving for your children’s college education becomes a higher priority, you may want to buy a bigger house, and/or you should ramp up retirement savings. At the same time, you’re likely earning more, and may benefit from bonuses or inheritance that can bolster the size of your investments.

During this timeframe you should be saving 10 to 20 percent of your income for retirement – increasing the amount steadily over the years. It’s also a good time to begin investing outside of your employer's plan. Consider diversifying your investment portfolio by introducing income investments, such as bond or stock and bond funds. Finally, consider implementing a dollar cost averaging strategy to minimize your investment risk.

“Consider diversifying your investment portfolio by introducing income investments.”

Age 55-retirement: When you’re less than 10 years away from retiring, protecting your assets becomes more important than continuing to pursue growth. During this time you may want to gradually shift more of your assets into fixed-income securities to achieve a better balance between growth and income. Income mutual funds, bond funds, and annuities can all play important roles in balancing your portfolio for retirement.

After retirement: Study the options you have for taking money from your retirement accounts and the impact they will have on your taxes. Then, review your combined potential income after retirement and reallocate your investments to provide the income you need and some growth in capital to help beat inflation and help fund your later years.

By thinking strategically about your investments during each stage of your life, you can help prepare yourself for all of life’s major milestones.

Updating your investment portfolio

Thanks to technology, stock market updates are available as they happen. If one of your stocks crosses a set value threshold, your phone may be able to alert you via text message. If the stock market takes a dip or surges upwards, you may be prompted to check the effects of that shift on your portfolio.

But being constantly connected to the short-term happenings of your investments has the potential to backfire. If your knee-jerk reaction to every change is to buy or sell stocks, you could easily trip yourself up.

Give it time

Selling a stock for a quick profit, for example, may cause you to miss out on potentiallong-term gains of that stock down the road. And habitually buying and selling may increase your transaction fees. Finally, shorter-term buying and selling may increase taxes you owe on capital gains, which in turn impacts the overall value of your nest egg.

If you’re looking for a well-balanced model for potential success, consider purchasing investments you see as having potential to build your wealth over the long term. Then, be patient and give your investments time to reach their potential. You can consider monitoring your investment performance and following industry news, but try not to let day-to-day fluctuations of an investment push you into a quick buy or sale. If a company and industry is performing well, then the price may follow, and you want to be well positioned for the potential rewards.

“Selling a stock for a quick profit may cause you to miss the potential long-term gains.”

Work with a full-service broker

If you lack the time, energy, or know-how to monitor your investments on a regular basis, you may use a “buy and hold” trading strategy, and appoint an advisor to monitor the progress. For example, you may open an account where you select the initial investments, but then you give your investment advisor the responsibility of reviewing their progress and rebalancing your investment portfolio when it makes sense to do so.

Even with this approach, however, you should be careful to review your statements and meet with your advisor on a regular basis to monitor your progress and make adjustments based on any changes in your personal circumstances. The U.S. Securities and Exchange Commission suggests reviewing all of your investments every six to 12 months 1 . Plan to rebalance your investment mix if it has shifted. You can bring it back to your original target mix by selling investments that have outperformed and using the proceeds to buy assets that remain attractive but may now be a smaller part of your portfolio vs. the outperformers. Portfolio rebalancing can instill discipline to stay on track, while encouraging you to sell high and buy low. 

If you assess your situation and think it’s time to make a change, ask yourself a few key questions before you move to sell. By sticking to your investment strategy and making deliberate trading decisions, you can potentially maximize your investments and help set yourself up for success.