11/23/2005

Start saving now

For a couple years now I have planned to open up a savings vehicle for my (future) childrens college expenses upon their birth. After reading this article, I realized that I really do not have an option, but it is a necessity to start saving as soon as possible. The current expected expense for four years at a public school including tuition, room and board is $49,670 and $120,371 for a private school. These numbers seem huge, but are rather small in comparison to what the projected rates are in 2020. The beginning rates in 2020 are around $126,178 for public and $305,787 for private schools. Granted inflation will take place and our incomes will rise, but these growth rates far exceed the inflation rate. With this being the case, the article reitterates the importance of "jump-starting" your savings accounts and it shows the results of doing so. It is also important to start evaluating your family's financial situation at least two years before the child enters college. This is to determine how much you (the parents) can help the student financially. Overall, this article is a good reminder of being prepared and aware of changes in the future. Whether a student, manager, or consumer, we all need to stay on top of our finances in order to help promote a steady economy.

5 comments:

Morgan said...

I found your post to be very wise, and practical. Saving is something that is difficult, but habitual. If you make saving a priority, and specifically set aside a portion of your income every month to save, you can think of it as an expenditure, and can simply build it into your budget. With planning, and saavy investing, your money can start to work for you, and not the other way around.

Chloe said...

I agree completely. The sooner you start saving, the better it will be in the long run. It's amazing how much it will cost to send kids to school, but it's all about making your money work for you. For some people, their finances don't allow them to help their kids with college, but putting money aside while your kids are young is a great way to start.

Dr. Tufte said...

Saving is a good idea, and saving for your children's education is an even better one.

Even so, there is a large element of scare tactics involved with the numbers here. If you work out the math, these correspond to growth of about 7% in nominal terms. Yes, that is higher than inflation, but it is not higher than what you can reasonably expect to have as increase in your nominal salary.

Most people can expect their real salary to grow at about the rate of real GDP (3.5% per year on average). However, young people can expect their salaries to grow somewhat faster. Add in a reasonable expectation of inflation in the 2-4% range, and it's likely that many of you will have nominal incomes that rise faster than the nominal cost of your children's education.

Matthew said...

Dr. Tufte makes an excellent point with savings accounts for education. No matter how good something sounds, you should always weigh the costs and benefits. As he said, if you can make more than the growth rate, invest your money somewhere else. If you don't expect to be getting a large change in income anytime soon, maybe an education savings plan would be a good option.

Dr. Tufte said...

I think there is some governmental busybodiness behind this. Do we actually know that people don't save enough for education?