Develop your college savings plan
Now that you have defined the cost of college, estimated how much financial assistance you might receive, evaluated the various savings plans, defined your savings goals, and assessed your financial situation, it is time to develop your savings plan. This entails four steps:
- Allocate amounts to the most appropriate type of plan(s)
- Select the specific plan(s)
- Define the appropriate investment vehicles within the plan(s), if applicable
- Document your plan
Define which type of plan(s) and how much to save
Not every college investment option is right for every family, but there's at least one that will be right for you. Some families may choose 2 or more options to meet their goals. The right plan for you may depend mostly on how much you have to invest. If you don't have much available cash, and can't commit to a fixed amount every week or every month, your best choice might be a savings bond. If you like the idea of investing for a greater return, and can afford at least $1,000 a year, then you might consider the Educational Savings Account. If you earn lots of money, then you might consider one or both of the 529 Plan options.
In selecting one or more options, don't forget that most investments aren't guaranteed: You could lose money in your college fund. The sooner you start investing, however, the more time you'll have to ride out the inevitable market fluctuations-and the better your chances of being able to pay college bills. Even small investments can really add up over time.
If you don't have time to make your own decision, or you are not certain what to do, consider getting professional help. An alternative is just to open a Section 529 college savings plan for each of your children. Section 529 college savings plans are one of the best college savings vehicles because of the tax advantages, the low impact on need-based financial aid, the flexibility, the high contribution limits and the lack of income phaseouts, and because control over the account remains with the parent.
Select the specific plan
Obviously if you are choosing savings bonds, you can just visit your local bank and they will assist you in choosing the most appropriate savings bond. However, if you are selecting any of the other plans, then you have some research to do and decisions to make. For example, if you are choosing an Educational Savings Account, you need to decide what type of investments you want in the account. Although we recommend mutual funds, the specific type of fund and the specific brokerage company will be your choice. If you are choosing 529 plans, the choices are somewhat easier, but you will still need to check out the various plans to make the best choice. At this point, you might wish to revisit our section on the specific types of plans in which we do provide details on plan choices.
Identify the appropriate investment vehicles within the plan
Depending on which plan you choose, it might be necessary for you to select the specific investments. If possible, we recommend an age-based plan that modifies the investment choices as your child gets older. This provides the best option for a higher return, while minimizing risk before your child actually needs the money.
Document your plan
Once you have made all the decisions outlined above, make sure that you write down the details on a piece of paper. This should include your goals, how much you intend to invest, where the money is coming from (i.e. budget changes), what type of plan you are choosing for your investments, your investment allocation, etc. When you review your plan results a year from now, you may not remember exactly what your plan was, so having it documented will allow you to easily review your status and make any necessary changes.
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