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Everyone Could Use A Lesson In Saving

Remember when you were young and your parents made you put a dime or quarter from your allowance into a savings account they opened for you? And at Christmas, if you got some money from Grandpa, they made you put half of it away in your account. It was intended to be your first lesson in saving. It was a lesson that has served you well—even now as you prepare to set up a college tuition fund for your own children. Put a little aside and over time, it will add up. But if you want to maximize those savings, it gets a little more complicated than that.

Good returns on your savings make accumulating the funds to pay for your child’s college education that much easier and faster. And historically, the best place to earn high returns has been the stock market. But, with the high returns, come higher risks. So how can you earn enough of a return on your investment while making sure the money will be there when needed for your child’s college education?

Here are the estimated annual savings and rate of return needed to accumulate $120,000, the projected cost for today’s five year old to attend an out of state college.

Rate of return Annual savings needed
2% $8,400
4% $7,300
6% $6,400

Uniform Transfer to Minors Act Accounts
One popular method of saving for education is to establish a savings account in your child’s name under the “Uniform Transfer to Minors Act.” While these accounts can provide some income tax relief once your child reaches age 14, they can also make qualifying for financial aid more difficult. In addition, the issue of who controls the funds becomes important since the child will legally control the account at age 18 or 21, depending on the legal age for your state.

Using different types of investments
A sensible investment strategy is to use different types of investment vehicles as your child grows. When your child is young, you can take more risk to earn higher returns with equities. As your child gets close to college, start slowly converting the equity investments into lower risk vehicles such as savings certificates. You should also consider certificates that continue to mature even after your child starts college, since you won’t need the full amount all at once.