How is your child’s college fund doing? If you don’t have one yet, well, it is never too early to get started. The way to get it started is to start. The best strategy to building a college fund successfully is consistency. First you must define a clear goal, a number. Then you need to look at your budget and see if achieving the goal in a given time frame is realistic. Below, we will run some numbers to help you get an idea about possibilities.
With prices of colleges on a sharp rise, and especially if you are on tight budget already, it may not be realistic to cover the costs 100%. But, any extra money you put aside into a college fund will surely come in handy when the bills come.
How much to put aside monthly
Let’s take a look at some realistic numbers now. Here are two examples of how much money you can have stowed away if you start at child’s birth. First you set a target amount. Let’s say you want to save a $100,000 by the age of 18. If you start at birth this gives you 18 years times 12 months of savings time. If you put aside money annually, then you have to put aside $5,555.60 every year. In monthly payments this translates to $462.96 every month. And the later you start, the more money you have to put aside each month or year. Getting a head start is essential!
Of course, the above math does not include interest. If you take into consideration some 2% APY (annual percentage yield), then you’ll end up collecting about $20,000 in interest. But 2% interest is a very generous estimate today. Reality is closer to 1% and the accrued interest would be half.
Let’s do a second calculation with $200 monthly and a savings period of 10 years. 120 months times $200 is $24,000. Interest in this case is $1,245, which brings you to a total of $25,245. Now, if at this point you stop your contributions and let this money only collect interest, then after 8 years this money will collect approx. another $2,000 in interest. This effort will leave you with about $27,000 and change.
College Fund with a Bonus
The examples above give you a rough idea on how savings accounts work using current numbers. Let’s now take a look on some numbers using two different juvenile life insurance policies. We’ll start again at age 0, pay for 10 years around $200 per month and see where we are. In Figure 1, you are paying a little more than $200 monthly and end up with a guaranteed amount of $27,113 after 18 years. Remember, the numbers for savings accounts are not guaranteed. The life insurance numbers give you a guaranteed amount, plus a chance to save more. Depending on how the policy provider performs, you could end up with with as much as $37,000. That’s presuming company keeps performing according to current indicators.
In Figure 2, you can see an illustration by a different provider. In this scenario, you pay a little less than $200 monthly. However, the guaranteed amount is again $27,113. The non-guaranteed amount is less, i.e. $32,624. But remember, in the 10 years of contributions, you paid $3,000 less than in Figure 1.
In both cases your savings efforts performed better than savings accounts. Both cases offer you access to your money if needed. And then, there’s the benefit. After only 10 years of contributions the life insurance policies are paid up. Meaning that unless you or your child cancel the policy, he/she has a lifetime of guaranteed $250,000 life insurance. Something that a savings account will not provide. That’s the great bonus. You end up with more money available for college expenses, plus a whole life policy.
Whole Life Policy is not a Savings Account!
And don’t let anybody tell you otherwise. Although there may be some similarities, there are plenty more fundamental differences. If you notice in the figures above, the cash value does not really start accumulating until after two years. A life policy is a long term investment vehicle only, and therefore operates on different principles. Another major difference is the withdrawal of your money. Savings account can give you instant access to your money. A life policy gives you several options, but neither of them is instant access. Withdrawing money from life policies is covered on our website here. So, when you decide to start a college fund, be aware that you are committing for the long term! Changing your mind early can be costly.
Let’s Get Your College Fund Started
Ready to explore your life insurance options in this area? Then let’s get together and discuss your personal situation and objectives. You can start by filling out this form here. Or just send us an email and let’s set up a time and get together in person or online to have a confidential discussion.