As summer begins to wind down, our thoughts tend to meander to what is to come in the latter half of the year. The crunch of leaves will soon be felt and heard beneath your feet. Sweater weather is right around the corner. The kids going back to school gives us an opportunity to get back into a rhythm and routine that is often lost during the summer months. The holidays will be here before we know it.
With all of this comes a need for caffeine. Fun fact, as I was writing this article, I went on the Starbucks App to see what the price of a grande latte was in our local area. I was stunned to see the price had ballooned to $4.95 for a standard order without oat milk or other flavorings.
Why am I writing all of this? Well, when I think of back to school, I also think of saving for college and how difficult that can be for many families. In fact, saving for college can be one of the most mentally taxing issues for parents while creating their financial plan. The ambiguity of what college will cost a decade or two from now, the unknowns of scholarships or grants, and the what-ifs about if your child will actually head to college can be daunting. How will you know what to save if you can’t see the finish line?
Well, I have a great place to start. If you ordered that grande latte just 3x per week, you would spend $14.85. Ok, not a big deal. But, if you did that for an entire month your grand total comes to $59.40. Over the course of a year you would spend $712.80 on lattes.
What if instead of spending money on lattes, we put that exact same amount into your child’s 529 college savings plan? Over the course of 18 years, you would have put $12,830 away for the future. If we take our $59.40 per month, invest it at a (modest) 5% rate of return over 18 years, our estimated total comes to $20,060. Depending on where your child goes to school, that number could pay for one year of tuition!
Other benefits of 529 college savings plans include the ability of the investments to grow tax-deferred and then be used tax-free for qualified education expenses. You also have the ability to change the beneficiary of the account should you have two children and one earns a scholarship. Anyone can contribute to your child’s 529 plan. So, for birthdays and holidays, instead of plastic toys perhaps ask for a paper check! Finally, beginning in 2024, parents will have the ability to use a portion of the 529 to fund a Roth IRA for their child once certain criteria are met.
As we turn the page on another summer, and head into the second half of the year, remember how much that grande latte that is fueling you could be worth down the line. Starting small with a few minor changes to our routine habits now can pay big dividends in the future.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.