Investing for Kids

After having my daughter, I had to think about investing for kids. No longer was I saving for material things such as a house or car. I was and am saving for a human being -- a most important human being.

I have personal experience with large amounts of college loans and how it can really drag a budget down. I do not want her to have that same financial burden hanging around her neck. Therefore, right around the time she was born I set out searching for the best way to invest for her future. Specifically, how should I invest for her college?

I found out that the government has setup a nice plan for investing for kids that is intended to be used for higher education - the 529 plan. There are two major advantages to the 529 plan. One, your gains are tax-free. Two, most plans to start off more aggressive as your child is very young and slowly and automatically transition into a conservative mix of investments as your child nears college.

Skipping out on taxes legally is a great way to increase your long-term gains. Therefore, I definitely wanted to use a 529 plan. However, there are many 529 plans out there -- one for each state -- and within each plan their multiple choices. The next step was deciding which plan to choose and what method to use within that plan. I spent a lot of time looking at the different options for 529 plans when my daughter was born. I went through the same investing for kids process again recently and I found out what the best 529 plans are.

How much savings are needed?

When I graduated from my masters program I had over $80,000 of debt. Not having that huge debt load tremendously help out my finances. Some school debt is okay, but I've heard of some debt numbers much higher than what I have and it makes one feel like an indentured servant.

If your child goes to a private institution, four years of tuition is the cost about $100,000. On the other hand, public university will be about $25,000 over four years. That is just for tuition.

Living expenses can vary just as much as tuition. I'm going to go ahead and assume expenses of about 1500 a month -- which comes out to $18,000 a year. If he or she goes to college in California or New York or another major metropolitan area, this expense can skyrocket quite quickly. Also, young people aren't known for being tight with their wallets. I know I wasn't when I was in college.

The total amount of money at a cost to go to college for four years comes out to about $100,000-$200,000 in today's money (you will be more because of inflation).

And how much needs to be put away monthly to meet that goal?

$300 a month in today's money will get you to about $100,000 and $600 a month will get you to about $200,000.

Notes: You will need to increase investment amount with inflation. Also, you may end up less than or more than what you expected because I'm assuming modest investment returns. I'm also taking into account that as your child gets closer to college your investment returns will diminish due to a more conservative for portfolio.

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