• Establish your goals – an amount (say 10% of your income increasing 1% every two years until you reach 20%) and reasons for saving (perhaps a house, vacation or automobile)
  
• Organize your finances – keep track of what you spend and why (this is known as a spending plan a.k.a. budget)
  
• Each week try to reduce your spending and place that amount into savings
  
• Balance your checkbook often and don't forget to keep track of debit and ATM transactions
  
• Avoid using ATM machines that require a service charge
  
• Measure what you earn (from employment, financial aid, other sources) against what you spend – keep track of the cents as well as the dollars. People who know where their money goes spend far less and save more. Keep a little notebook with you to record your small cash purchases.
  
• Keep it basic -- pay off credit card and other debt and don't take out more in student loans than is absolutely necessary. Start paying off your credit cards beginning with the one with the highest rate. Cut up all of them except the two with the lowest rates. Begin paying extra every month on the card with the highest rate. When it's paid off, move to the card with the next-highest rate. When you're finished, start adding what you were paying in credit card payments to your savings account. By paying down debt, you get a return of whatever the interest rate happens to be. So pay off $1,000 that you're carrying at 21% and you get a 21% return. 
  
• Keep living expenses to a minimum – shop with coupons, live with a roommate, purchase store brands (Note: every dollar you don't spend on a house saves roughly $2.40 in mortgage payments
  
• Don't wait to start saving because time is money -- $50 per month at 5% for 10 years will amount to $7,764, the same amount over 20 years equals $20,552 a $12,788 difference by waiting 10 years
  
• Establish a saving habit and save consistently – set up an automatic investment plan, arrange to have $50 a month deducted from your bank account and deposited into a mutual fund account with below-average risk, low minimum purchase requirements and a good, steady record of solid returns. 
  
• Maximize use of your company's 401(k) plan at work – employers often match employees contribution up to a certain limit (a 50cents on a dollar match give you an immediate 50% return on your money). If you have maxed out with your company's retirement plan consider the Roth IRA, which means you contribute after-tax dollars, but that can be withdraw in retirement tax-free. 
  
• Keep a long-term viewpoint – spending some of your retirement plan money before you retire can be very tempting but it is important to remember that you can't retire on money you have already spent
  
• Get financially savvy – money ambivalence is the greatest detriment to financial security
  
• Protect your most important asset – your ability to work 
  
• Consider paying a extra each month on your mortgage – you can round up your payment to the nearest hundred, you can add an additional $50 or more to the principal payment or you can pay on a bi-weekly basis, thus dividing your monthly payment in half every other week. Any of these approaches will add equity to your home, giving you extra flexibility when you decide to move, refinance or take out an equity line of credit to help pay for college. If you prepay $100 a month on a $150,000 loan, you will save $72,952 in interest and shave 7 1/2 years off the loan.
  Seek better safe returns – move extra money from your checking account to a passbook savings account, move passbook saving account money into certificates of deposit
  
• Pay off your car loan – deposit the equivalent of your car loan payment into savings
  
• Properly maintain and service your car – automobiles are now build to last for between 100,000 and 150,000 miles when properly serviced and maintained. Your auto can give you years of transportation without the burden of a car payment.
  
• Review term life insurance policies -- if you've had the same term life insurance policy for five years or more -- you can probably cut your premiums dramatically by changing policies. Put any savings from reduced premiums into savings.
  

The Easiest Way To Make Money
The easiest, less stressful way to make money is to take advantage of time. For example, the time someone has between 23 years of age and 24 years of age can never be repeated. You can never use this time again to generate and compound interest. Saving $25 per month starting at age 23, represents only $300 per year or 82 cents per day. Lets assume the savings earn a conservative 6% interest. This money is deposited in a qualified retirement account (individual IRA, Roth IRA, 401(k) plan) so that the funds are not taxed on the interest earned. This is done year-in and year-out until retirement at age 67. At this rate you would have contributed $13,200 to the account and will have earned $51,407 in interest. Waiting until age 33, the contributions would have to be doubled to match the same total by age 67. Of course higher rates of return could be sought, but this would require higher levels of risk. If at age 34 contributions into a personal IRA were stopped and the amount directed into a qualified pension plan that fully matched the contribution, the return, assuming the same rate would be 48% higher, totaling $95,647. And this is with the same 82 cents per day contribution.

Don't let the $25 per month example mislead you. Years of compound interest, especially tax-deferred compound accumulation will result in much more money to withdraw than you put in. Think of the example in terms of accumulating between $64,000 and $95,000 for every 83 cents per day saved starting at age 23. A $100 per month could yield $408,630; $200 per month $674,694 and $300 per would put earning near the millionaire mark at $940,759. 

How Aggressive Should Your Savings Plan Be?
This question heavily hinges on four things: 1) the amount of time you have before your child begins college and 2) the amount of risk you are willing to incur. The more time you have, the more aggressive you can afford to be. If the stock market dips, as it certainly will, you will have time to wait for it to rise as it historically has. As your child grows closer to college, you should shift a portion of your investments into safer instruments like low-risk mutual funds, Certificates of Deposit, T-bills and bonds. That way, you'll keep earning interest without incurring an undue amount of risk and potential loss. Families need to also take into consideration the cost of education and other financial goals and responsibilities.


FAQ – Saving for College

Top

s Will saving for college limit the amount of financial aid my child receives?
s What are state prepaid tuition plans?
s What does it mean to diversify my investments?
s With more than one child to save for, how should my investment strategy change?
s With over $68 Billion in financial aid, do families really need to save for college?
s How much does a family need to save for college?
s How much should I save?
s How should I save it? 
s Should parents save money for college in the student's name because of the tax advantages?
s What is meant by Aggressive, Steady and Low-Volatility funds?
s Should I use a financial advisor?
s I only have a few years before my child enters college. How can I catch up on my education savings?


Q - Will saving for college limit the amount of financial aid my child receives?

Yes. Part of the formula used to determine financial aid awards from the federal government is your income and assets. Those who have savings will be expected to contribute more toward their children's education than those who do not. However, the formulas for determining this contribution count employment income far more heavily than savings, so the difference is usually not substantial. Regardless of savings, most families qualify for financial aid if they still have the need for it. Also, many scholarships are awarded without regard to financial need. Look to combine financial aid with your own savings. A family that saves will have the funds necessary to meet their expected contribution, while a family that does not save may have to borrow, with interest charges more than making up for their smaller expected contribution. In the long run, paying for college from savings and current income is less expensive than borrowing. In doing so, you and your children will be better off. 
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Q – What are state prepaid tuition plans?

Prepaid tuition plans, are offered by a number of states and allow families to pay for a future college education at today's prices. Each plan varies, but generally speaking, all allow parents, their friends and family members to purchase credits toward tuition at today's prices regardless of when their child goes to college. There are some drawbacks. Plans may require the savings be used at certain schools, generally public ones in your state. The policies used to cash these plans in for use at other institutions vary. You should check out the particulars of a plan before you commit. Also, prepaid tuition plans invest very conservatively. You could most likely save the same or a greater amount of money in other investment/saving instruments or a Section 529 plan while only incurring a slightly higher level of risk and not limit where your child goes to school.
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Q - What does it mean to diversify my investments? 

Simply put, it means do not put all of your savings in one investment instrument. Diversifying investments means spreading your savings dollars around in different savings instruments such as stocks, bonds, mutual funds, certificates of deposits (CDs) and money market accounts. By doing this, you add a level of security to your college savings through diversity. 
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Q – With more than one child to save for, how should my investment strategy change?

Your investment strategy will not be any different. You will have to save more each month or each year, but where you invest your money, how you diversity it and what you hope to save per child should remain constant. What is key here is to take a careful look at your budget, particularly the family’s spending and make saving for college one of your priority goals. You cannot control or predict interest rates but you can commit to saving. Remember saving is rewarded best when it is done early and often. 
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Q - With over $68 Billion in financial aid, do families really need to save for college? 

YES! Though it is true that financial aid is available for most students, increased college enrollment and ever-growing costs make it more and more important for families to save for post-secondary education. Few students actually receive a financial aid package that covers their entire education. Because of interest, educational loans are repaid for more than what was borrowed. By starting to save early and often, families will have more money for college than they invest. That's the power of compounding interest.
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Q - How much does a family need to save for college?

That's virtually impossible to predict with precision. However, there are a few factors that determine college costs. First is when your child will begin college. Tuition and fees are rising by an average of about 4 to 6 percent annually. Will your child attend a public or private school? Generally speaking, public schools are less expensive than private schools. The EAS Education Resource Center has created a Seven-Step Approach to Paying for College which will assist you in establishing a ballpark estimate of what your child's college education will cost and how you can build a plan to pay for it. 
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Q - How much should I save?

That's a tough question with no clear answer. Save what you can without overextending yourself or ignoring the need for retirement income and other family goals in the process. Be creative and dedicated to saving. Look at you family circumstances and see where you may be able to consolidate and save. Aim to at least save 5% of take home income. Encourage your kids, to participate by adding to the savings fund from their allowance or work. Encourage the extended family, especially grandparents to add to the college savings fund. Some families have made it a family tradition to build an ongoing family college saving fund that continues with each generation contributing. If you can manage $25 per week ($100 a month) without taking all the joy out of your life, then by all means do it. Certainly, there will have to be some spending cutbacks, but there is no need to break the bank altogether or to vanquish your recreational life while you save. As important as how much you save is how regularly you save. Make saving a habit. Treat it like a monthly bill. Put money into a college savings account every week, month or year and let compounding interest work for you.
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Q - How should I save it? 

This is the real question and opportunity. Saving for college is a schizophrenic pursuit. On the one hand you've got to invest aggressively enough to accumulate thousands of dollars by the time your child is ready for school. On the other hand this is your child's future we're talking about: You can't afford to lose one penny of principal. There are numerous savings instruments available, but choosing the right one for your family’s needs and level of comfort is difficult. Where you put your money should be determined by how much time you have to save and how much risk you are willing to incur. For example, “Aggressive” funds, are appropriate for long-term investors, while “Steady” funds are best suited for a three- to seven-year investment horizon. “Low-Volatility” funds fit well with shorter-term investment goals. Aggressive and Steady funds are geared to parents whose children range in age from birth to eight years old because this is when they can afford to take the most risk. By the time your child reaches high school age, and during the four years he or she is in college, safety will be your No. 1 concern. Here Low-volatility that are almost as safe as cash, but whose returns exceed what you would receive from a money market account or a certificate of deposit would be good savings decision. 

So read up on mutual funds, custodial accounts, Education IRAs, prepaid tuition plans, trust funds, savings accounts, savings bonds, stocks, bonds and all of your other options. See the EAS Education Resource Center, Financial Planning Web Sites.
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Q - Should parents save money for college in the student's name because of the tax advantages?

Probably not. Financial aid offices expect a higher contribution from the student's savings than from the parents' savings (35% from the student's versus 5.64% from the parents).
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Q – What is meant by Aggressive, Steady and Low-Volatility funds?

Aggressive funds return far above the average stock mutual fund. These are funds that deliver high long-range returns, regardless of their short-term volatility. These are funds that may more than make up for their short-term losses with excellent long-term gains. Steady funds are funds that can offer parents the best of both worlds: returns that consistently outperform the market and risk rankings that are far below that of the average aggressive stock fund. These are funds that provide strong returns without taking outsized risks. Low-volatility funds are best suited for short-term investing. Such funds are almost as safe as cash, but whose returns exceed what you would receive from a money market account or a certificate of deposit such as Treasury strips and low-volatility mutual funds. 
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Q - Should I use a financial advisor?

Another tough question. This will depend on family and personal circumstances. If you have a sound knowledge of personal finance and a couple of hours to devote to reviewing and updating your savings plan each month, then you might be able to handle things yourself. If this is not the case, then consider a financial advisor. Financial advisors not only lend expertise, they also provide an important impartial opinion in the savings process. Please see the EAS Education Resource Center, Choosing a Financial Planner.
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Q - I only have a few years before my child enters college. How can I catch up on my education savings? 

Trying to play the catch-up game with savings is dangerous. While it is possible to pay for an education when you haven't saved for it, it is infinitely easier when you have invested in a saving plan over the years. Many parents are surprised to discover how little they really need to put aside on a monthly basis to save for tuition costs. The less time you have to save the smarter and more conservative you need to be. While you may only cover a portion of your child's college costs, you can ensure that you'll at least be able to pay something. It's very important that you begin a savings plan as soon as possible. Time is the most valuable commodity in this process.

Parents should consult with a reputable financial advisor who can guide them through the process of saving for education. There are tax ramifications and other complexities with which parents need to be familiar. In addition, many states, universities, and consortia of universities offer tuition savings and pre-payment plans, which frequently are worth investigating. There are variations depending upon the state offering the program, and there may be tax liabilities associated with some of the programs. Some colleges and universities offer pre-payment programs of their own. These programs allow you to pay a lump sum to the college just before the student begins attending college, or even years before the student is ready to attend college. Parents also should become familiar with the new education benefit programs, such as the Education IRA, Hope Tax Credit, and Lifetime-Learning Tax Credit. 
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Academic Excellence Combats The Saving for College Dilemma for Less Prosperous Families

Your average middle class family has not paid a lot of attention to college savings plans. Tax shelters, for college or anything else, work best for people with higher incomes and cash to spare. If you're middle or upper-middle class, even if you cannot or will not save, you can now write off some of your college expenses on your tax return. This does not help kids from families that don't have money to put into tax shelters. The new tax credits help only people who have enough money to take advantage of estate and tax planning. The new tax credits give no special help to the working poor.

Pell Grants are Washington's principal aid program for students in need. In 1979, the maximum Pell covered roughly three-quarters of the cost of a public four-year college. In the early 1980s, however, Congress reduced the size of Pells-ironically, just when many states began to raise tuition costs. Would-be students saw their purchasing power shrivel. Funding was slowly restored to the Pells in the 1990s, but not as generously as before. The maximum Pell now covers only one-third of the average four-year cost.

In place of grants, emphasize has been placed on loans in financing college. In the long-run loans don't work as well for the poor as they do for the middle class. For example, low-income students have no experience with the significant debt that paying for a college and/or graduate education may entail. Many low-income student would rather take a full-time job and go to classes as part-time students when they can. This also makes these students odds on favored to not complete their educational potential. Since the mid-1980s, there's been a sharp drop in the portion of low-income students getting four-year degrees with more enrolling in two-year institutions.

Middle-income students are indeed finding the money, especially in new government programs. Nearly 40 percent of federal aid is now awarded without regard to financial need, reports the College Board. That reflects the great value of low-cost student loans which are now open to everyone, regardless of income. 

Many states are responding positively. California has expanded its scholarship program for students of modest means. California residents will be able to go to school tuition-free. Community colleges for C students; a state college for B students and up. The scholarships can also be used toward the cost of attending a private college.

Georgia provides free tuition, at a public college, to every student with an average of B or better in college-prep courses (English, math, science, social studies, foreign language). There's also a tuition award toward the cost of private colleges.

In Georgia, students qualify regardless of income, so middle-class kids have a leg up. Until this past July, the state program effectively excluded the poor. Now they qualify, provided they do well in college prep.

The point to be made here is that although the paying for college sweepstakes is tilted in the favor of more prosperous families, students can level the playing field a bit by excelling in their academic work.


Saving In Your Child's Name

Parents should carefully consider the financial aid implications before saving or transferring money into their child's name. If your children have any possibility of being eligible for financial aid, it is strongly suggested that you do not put assets in your children's names, regardless of the tax savings. In general, unless the family is certain that their child will not qualify for need-based financial aid, money should be saved in the parent's name, not the child's name because parent assets do not have as much of an impact as is usually assumed.

Far more families qualify for financial aid than most realizes. Families with incomes and assets in the six figures often receive aid or get a government-subsidized loan for their child. Over $68 billion in financial aid was awarded to families of all income levels in the 2000-2001academic year. And nearly 50% of all students receive at least a partial award. The only way to assure you won't get an aid package is to be shy about asking for one


If the family is without question, certain that their children will not qualify for financial aid, they should take advantage of all the tax breaks they are qualified. But be very careful about assuming that you won't be eligible for financial aid because you earn too much or have too many assets, since parents are often mistaken when they make this assumption.

Assets in the child's name has one major benefit, the tax savings due to the child's lower tax bracket. 

An asset in the child's name has two major risks; the transfer of assets from parents to child will result in a reduction in eligibility for financial and the child is not obligated to spend the money on educational expenses.

Setting up an account in your child's name can immediately cut your tax bill. Because the taxable income generated by the college account gets "split off" from your return and included in your child's 1040 instead. The tax savings can amount to big dollars, as your child will likely be taxed at a 15% rate for ordinary income and 10% for long-term capital gains. However, your child has to be the legal owner of the college fund for this strategy to fly with the IRS. So you'll have to make gifts to get money into the child's hands. You can gift up to $10,000 per child per year ($20,000 if both parents make a gift) without any gift tax consequences. The money can go to establish a custodial account in your child's name — with you as the custodian — under the Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). Another way to save in your child's name is through a prepaid college plan. 

Avoiding the Kiddie Tax
The so called Kiddie Tax only applies if your child: (1) is under age 14 and (2) has over $1,400 of taxable investment income (so-called unearned income). In this case, the first $700 of income is sheltered by the child's standard deduction. The next $700 is taxed at only 15% (10% for long-term capital gains). Only the excess over $1,400 gets hit with the kiddie tax, meaning that amount gets taxed at the parents' marginal rate. If there's no excess, there's no Kiddie Tax.

One way to ensure there is no excess, is to invest in low-dividend growth stocks, low-turnover mutual funds or even Series EE U.S. Savings Bonds, whose interest income is tax-deferred until the bonds are cashed in. Once your child hits age 14, you can cash out of any of these investments at his tax rate (probably 10% for capital gains). And all dividend income will be taxed at your child's rate, probably 15%, from then on as well. 

Loss of Control
Another drawback to putting money in your child's name is that your child must own the college fund for those tax savings to materialize. With a custodial account, the child will eventually gain unrestricted access to all that money (usually at age 18, 21 or 25 depending on state law and whether gifts were made under UGMA or UTMA). 

The loss of control problem can be surmounted by setting up a Crummey trust to function as the college fund, with you acting as trustee. You'll need a lawyer to set up the trust., but it should not be very expensive

With the Crummey trust, you make an annual college funding gifts to the trust. As with a custodial account, you can put in $10,000 annually ($20,000 if you are married) with no gift tax worries. After each annual gift, your child has the legal right to withdraw that year's gift (and that year's gift only) within a designated timeframe (30 days is standard). While trusts don't generally qualify for $10,000 annual tax-free gifts, Crummey trusts do because of the annual withdrawal possibility. As a practical matter, your child is not going to exercise the withdrawal right until he or she is no longer a minor. Until then, you can make all financial decisions on your child's behalf. 

The trust's investment income gets taxed on your child's return, even though the trust actually retains the assets. You will most likely want to distribute enough each year to pay your child's taxes. As with a custodial account, the Kiddie Tax must be finessed until age 14. The bottom line is that you gain the benefit of your child's lower tax bracket without exposing the college fund to your child's greedy little clutches. 

If your child the beneficiary of the trust does not go to college, you as trustee simply refuse to disburse any funds until he or she reaches ages designated in the trust document, which may be 30, 35 and 40. This gives your child plenty of time to "mature."

Here are several strategies to reducing taxes on a college savings fund. 

• Borrow up to $50,000 against a qualified retirement account at work. The interest is nondeductible. In this situation you are paying the interest to yourself. However, the loan must be repaid in five years. If you leave your employment, the loan must be repaid almost immediately. 
  
• Take out a margin loan against taxable investment accounts and deduct the interest under the college loan rules if applicable. Do the same for loans from other sources used to pay college bills. 
  
• Generally up to $100,000 can be borrowed against the equity in your home. The interest on a home equity loan is generally deductible up to certain limits. Beware that your deduction will be wholly or partially disallowed if you owe the dreaded alternative minimum tax. Also note, as discussed in the Education Resource Center section on Learning the Language – Maximize Your Financial Aid Possibilities, if the parent has received the proceed of an equity loan, those funds must be reported as an asset on the FAFSA, As an asset, the funds will be assessed to be used as part of the family contribution thus reducing the student's financial aid eligibility.
  
• For those that qualify for a Roth IRA, nondeductible contributions can be made which will earn tax-free income. When the it come time to pay the college bill, tax-free withdrawals up to the amount of the contributions can be taken because they were made with after-tax dollars. This is not a preferred strategy because once a deduction has been made from a Roth IRA there is no way to get the withdrawn money back into the account. The capacity to earn future tax-free income is permanently reduced. 
  
• By carefully managing investments tax deferrals can also be achieved. Holding an investment long term, thus not paying taxes on the appreciation, results in only a 20% long-term capital gains tax when sold. Selling investments that have lost value at the same time will reduce your tax or result in no tax on the transaction. 
  
• Current taxes may also be avoided by taking margin loans on investments. 
  
• Investing in tax-efficient mutual funds won't result in 100% tax-deferral, but is an effective minimum tax wise strategy. 
  
• Another alternative for those who need cash to pay the college bill without triggering a tax bill: the Section 529 state sponsored college savings accounts. Some allow you to invest as much as $100,000 or more in a child's account without paying any gift tax. The withdrawals (to pay qualified college expenses) and earnings on these accounts are tax-free. For more information on the 529 Plans, see the page in this section of the Education Resource Center and the Web site (http:/www.savingforcollege.com).
  

As with all family financial decisions, consult and work closely with your financial advisors to assure that any financial strategy you consider is appropriate for family goals, objectives and priorities.