On this 5/29 day, a reminder to start saving for college early

On this 5/29 day, a reminder to start saving for college early

Early 529 plan contributions may open the door for growth and flexibility

As parents, we all want to provide the best education for our children, but with the cost of college tuition rising steadily, planning ahead has never been more important. One of the most effective ways to secure your child's educational future is to begin investing in a 529 college savings plan. One of the biggest advantages of contributing to a 529 plan early is leveraging the power of compound interest. In this post, we'll explore how compound interest works and why it plays a critical role in potentially maximizing your college savings.

Understanding compound interest

Compound interest is often referred to as the "eighth wonder of the world," and for good reason. With the potential to earn interest on both your original investment and on the interest that accumulates, your money may grow exponentially over time. By prioritizing “time in” the market over “timing the market,” even small contributions to a 529 plan may potentially grow into significant sums thanks to compound interest. Starting your 529 plan when your child is young—think newborn or toddler—gives your investment the longest possible time to grow. More years in the market means more opportunity for compound interest to potentially work its magic.

Illustrating compound interest:

Let’s say you start a 529 plan with $1,000 when your child is born and contribute an additional $100 every month. Assuming an average annual return of 6%, by the time your child turns 18, your account would have grown to approximately $38,735. In contrast, if you start when your child is 10 years old with the same initial and monthly contributions, the total would be around $16,388—a substantial difference!¹

Increase your ability to take risk

By starting early, you can potentially adopt a more aggressive investment strategy since you have more time to recover from any dips in the market. Then, as your child nears college age, you can think about gradually shifting to more conservative investments. A financial professional can help you choose between different age-based and target risk investment portfolios and determine the options that are aligned with your desired risk/reward profile.

Smaller contributions, bigger impact

When you start early, you don’t need to make large contributions to see significant growth. Regular, smaller contributions can add up over time, making it less financially stressful than trying to catch up later. With a small minimum investment or no investment, 529 funding options can accommodate nearly any savings budget. Some states alsoprovide tax incentives to residents who contribute to 529 plans.

It may make sense to set up automatic monthly contributions to your 529 plan account. An automatic investment plan (AIP) or pre-authorized contribution (PAC) can be tailored to meet your savings goals. It’s easier to budget this way, and you’ll be less likely to miss a contribution. View the automatic contributions tool to understand the potential impact consistent contributions can have on 529 plan growth.

Conclusion

We believe starting a 529 plan early for your child’s education is one of the smartest financial decisions you can make. It harnesses the power of compound interest, potentially allowing your contributions to grow more significantly over time and possibly reducing the burden of college expenses. As your financial situation improves, consider increasing the amount you contribute. Even small increases may make a significant impact due to compound interest.

By planning ahead, you can help ensure that your child has the resources they need to flourish, without the burden of heavy student loans. Call 1-877-615-4116 to obtain a CollegeBound 529 new account application for you and/or your clients today!