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Brick by Brick; Dollar by Dollar.

April 10th, 2017 |

A Little Adds Up to a LOT.

A Little Adds Up to a LOT.
Recently, I was at a benefits & wellness event in a downtown Denver office building when a U.S. Postal Service carrier caught my eye across the lobby.  She was working her shift, delivering mail to the building tenants, but crossed the room to me with a big smile on her face.

“We have two in college, and our baby graduates high school this year.  We will have put all three of our children through college without incurring any debt. It’s so important to save for college, and we always put away a little something.  She leaned in close and whispered, “There were years when we sure didn’t have much, but we scrimped and saved every little bit we could.  We made sure we always saved something.  We are very grateful for CollegeInvest.”

What an amazing accomplishment.  As parents, they started saving early, and were living proof that a little can absolutely add up to a lot.

I started thinking about what that looks like for a parent of a newborn today, facing the looming reality that a public, in-state school will run over $200,000 by the time those little nuggets are on a college campus.

  • What if, like most new parents, you are more concerned about paying for diapers, daycare and formula than something that seems a lifetime away?
  • What if you don’t have a lot of extra income available to put into a college fund?
  • What if you took the same approach that my postal worker friend did and saved a little at a time?

I ran a quick spreadsheet exercise to see what this might look it.

Say in baby’s first year, we put $25 into our 529 account every month.  (Most of us get paid every two weeks, so this is only $12.50 out of each paycheck.  Seems reasonable, even with the other newborn expenses).

Then when our child turns two years old, we start saving $50/month.  Again, only $25 per paycheck.

What if we continue to increase our contribution every year, but just by $25 a month, and only until age 12.  By that time we are putting away $300/month and we’ll hold here, continue to contribute while he is in college, and rely on the magic of compounding interest.

Remarkably, by saving only $25 a month and increasing that amount by only $25 every year, by the time our child graduates, we’ll have saved over $88,000.  And the most beautiful part it that over $32,000 is earned interest!

 

529 Savings Contribution Schedule Example
Age of Child
Monthly Contribution
Number of Months
Annual Contribution
5% Interest
Compounded Contributions
1
$25
12
$300
$15
$315
2
50
12
600
46
961
3
75
12
900
93
1,954
4
100
12
1,200
158
3,311
5
125
12
1,500
241
5,052
6
150
12
1,800
343
7,195
7
175
12
2,100
465
9,759
8
200
12
2,400
608
12,767
9
225
12
2,700
773
16,241
10
250
12
3,000
962
20,203
11
300
12
3,600
1,190
24,993
12
300
12
3,600
1,430
30,023
13
300
12
3,600
1,681
35,304
14
300
12
3,600
1,945
40,849
15
300
12
3,600
2,222
46,671
16
300
12
3,600
2,514
52,785
17
300
12
3,600
2,819
59,204
18
300
12
3,600
3,140
65,944
19
300
12
3,600
3,477
73,022
20
300
12
3,600
3,830
80,453
21
300
12
3,600
4,203
88,255
Totals
$56,100
$32,155
$88,255

Importantly, there are tax-benefits of a 529 plan that I haven’t even mentioned yet.  For Colorado residents, you get to deduct your 529 contributions from your State income taxes—dollar-for-dollar.  And that $32,155 earned interest?  As long as you are using the funds for higher education expenses, you’ll never pay tax on those earnings.  Not while it’s in the account, nor when you take it out.  It’s completely tax-free growth.

It takes less than 10 minutes to open an account on-line.  Click here and get started today.  And please give us a call if you have questions.  We are here to help you make a little add up to a LOT!

My methodology:  I used 5% interest assumption and a simple annual compounding calculation. In reality, interest is compounded monthly, so the numbers would be slightly higher.

Important Considerations: To learn about CollegeInvest’s 529 program, its objectives, risks, costs, restrictions and qualifications regarding the program’s benefits and potential tax advantages, please read and consider carefully the Plan Disclosure Statements (PDS) available at collegeinvest.org before investing.  Also, check with your or your beneficiary’s home state to learn if it offers tax or other benefits for investing in its own plan.  Administered and issued by CollegeInvest.  Investments are not guaranteed by CollegeInvest, the State of Colorado, its agencies, The Vanguard Group, Inc., Ascensus College Savings, QS Legg Mason Global Asset Allocation, LLC or FirstBank, and may lose value, including principal amount invested.

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