Getting a good college education is one of the most important things that many of us will ever do. It single-handedly affects so many different aspects of our lives; from the friends we make, to the kinds of jobs we get and more, a good college education is a major stepping stone towards a meaningful and lasting life.
The problem is, college is becoming prohibitively expensive for most Americans. Who would've ever thought that here in America as many as 60 to 70% of families would not be able to afford to send their children to college? Colleges are one of the few things in this country that tend to increase their fees higher than the nominal rate of interest each year. For instance if inflation is around three or 4%, you can expect colleges to raise their rates between seven and 9% on average. Of course not every college is like this, but more and more are starting to become this norm instead of the exception.
And with the recession of 2008 to 2009 and beyond crippling the ability of many families to afford basic health care, let alone college... financing an education is becoming more and more difficult as time goes on.
So what can you do as a parent to make sure your child has every opportunity possible when it comes to college education? That's what I'm going to talk about in this article today. There are a number of things you can do to make sure your kid has enough money for college.
The first thing to do is start saving early. Compound interest is a magical and wonderful thing that will allow just a little bit of money to grow and grow over time allowing you to finance most of if not all of your child's educational costs. When it comes to compound interest, the most important thing is to start early. The best case scenario is to start saving as soon as your child is born. It doesn't have to be much, whatever you can afford at the time is better than nothing. Over the next 20 years the interest on top of interest on top of interest will transform whatever you can save into a much larger sum area.
And if you set up a college savings account sponsored by your state, the money that you invest will likely grow absolutely tax-free, which is a huge huge benefit and goes a long way to finance your child's education.
The next most important thing is to keep your investments as liquid as possible within the last few years before your child begins college. What do I mean? Well let me tell you a story... I once knew a family who invested in rental houses. They bought their first one when their child was born for a few thousand dollars down payment on a 20 year mortgage. Then they rented it out and the rental income went to pay the mortgage that they borrowed when they bought the house. As years went by, instead of investing in the stock market or savings bonds, they bought additional houses. Every few years they'd save up enough money for another down payment on a new house and away they went.
They figured that with a 20 year loan on each house, those loans would be paid off right around the time when their children would go to college leaving them with houses that they owned free and clear. At that time they would sell the houses and use them to pay for their children's college education.
This was a great idea as far as ideas go... but they didn't sell the houses soon enough. When it was time for their kid to go to college, there was a major housing market downturn and they were not able to sell the houses right away.
That's what I mean by keep your investments liquid within three years or so of your child beginning college. If my friends had started to sell the houses when their children were 15 years old instead of waiting until they are 18 years old, they would've had no problem selling them.
These are just two tips that you can use to help finance your childrens college education.