As with any long-term financial goal, getting an early start can increase the amount an investor is ultimately able to save. A longer savings horizon means there’s more time to sock cash away; it also allows for a more aggressive asset allocation, particularly during the early years. Compounding, of course, works best when assets have more time to grow.
“Getting started often creates a momentum that carries forward,” says Clifford Felton, wealth planning researcher at Vanguard. “And savers don’t need to get too hung up on the specifics at first; they won’t know which school Baby will ultimately choose, or what the precise costs will be, until much later. Just taking the time to open a college savings account—either a 529 or an after-tax account earmarked for higher ed—and setting up a simple monthly contribution schedule now can go a long way toward college funding success later.”
The numbers bear the just-get-started strategy out. Vanguard research has found that when parents start making contributions when the child is born, a 2.9% annual savings rate, averaged across the studied incomes, could be high enough for them to hit a realistic college-planning target. Wait until the child is 5 or 10 to start saving, and that rate jumps to 4.7% and 8.2%, respectively. This research spans a range of incomes, considers potential need-based aid, and assumes savings are made into a qualified 529 account with future qualified withdrawals.1
It may be difficult for many parents to hit these targets, especially as they adjust their budget to welcome a newborn. Felton suggests families starting by saving as little as $50 per month—or whatever the minimum monthly investment is for the family’s state plan—then increasing that amount as time goes on and their budget allows. It may not sound like much, but this strategy can forestall the need to play catch-up later.