Education Savings Plans

Do you have a child? Have you developed a financial plan for meeting the cost of his or her college education? You should. It's never too early.

Is Investing the Right Option for You?

College tuition is a big expense, so you should plan on several different strategies to help pay the bills. Investing is just one of those strategies, but if you start early enough, it can take care of much of the expense. The easiest way to get started is to set aside a small portion of your salary each month to contribute to your child's college fund.

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For example, to accumulate $10,000 over an 18-year period, how much do you think you would need to invest each month? Assuming a 10 percent earnings rate (which is about what the historic return is for stocks and stock mutual funds), you would need to contribute only $17 each month. That's less then your cable bill. That's less than your phone bill. That's less than a large pizza and drinks delivered to your door. But if you wait until there are only 5 years before college, you will need to put in $151 a month to get the same results.

How much risk should you take with your investments? There are two answers: How much time do you have? And what's your risk tolerance? If you have 18 years to work with, many financial experts agree that you can be aggressive. You can consider a college fund that is 100 percent in stocks and stock mutual funds. As your child enters junior high, however, you need to cut back on this aggressiveness and shift your investments so that 20 to 30 percent is in bonds and bond mutual funds. And when your child is from ages 14 to 18, an asset mix of 40 percent stock investments, 40 percent bond investments, and 20 percent cash investments (such as CDs and money market funds) is prudent. This strategy reduces the risk that a sudden stock market drop will greatly set back your financial plan.

Based on Your Comfort Level

Of course, you should only take as much risk as you are comfortable with. For example, have you never invested in stocks and bonds, or have you been in these markets for more than 5 years? Your experience level is important. Are you comfortable with investments that may lose money from time to time, as long as the investment offers the potential for high long-term results? You really need to do a gut check. For example, many aggressive growth mutual funds have been know to drop 20 percent or more in value during brief periods. Are you the kind of person who will quickly sell, instead of being patient and letting the fund make a comeback?