Balance Risk and Return for College Costs

Building a college nest egg can take some time, which means that your investment strategy must change depending on where your child is on the road to college.

With college tuition soaring [Hack #91] , parents who want to pay for their kids’ education need as much help as they can get. Tax-advantaged education accounts [Hack #92] and [Hack #93] are a huge help, but by far the best thing for college savings is time. By starting to save for college early, you can invest in stocks and earn returns that keep up with or exceed college tuition increases. However, stocks are risky for the short term [Hack #37] , so you must move your savings into safer investments as your child gets closer to college age.

Get a Head Start on College Costs

If you’re an overachiever, you can start setting money aside for college before your bundle of joy is even a glimmer in your eye. For many parents, the birth of a child is a wake-up call (even several a night for many months). As the costs of raising an infant begin to roll in, you might forget about the college costs looming decades in the future. However, these early years are great for getting ahead of the college curve. Start investing money regularly in mutual funds that own stocks. Because of the number of years you’ll have to save and the higher returns that stocks or stock-based mutual funds provide, your monthly contribution can be more reasonable, as demonstrated in Figure 9-5. With 12 years of ...

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