There’s no doubt about it; saving for college can seem daunting. The average per-year total of tuition, fees and room and board is about $20,000 for public colleges and universities. That number jumps to roughly $40,000 for private schools.
The key is to plan ahead. So many families wait until their child reaches high school before thinking about a college savings plan. Fidelity Investments suggests following a “2K Rule of Thumb”. Multiply your child’s age by $2,000 to see how much you should have saved to be on track. If you follow this plan, your savings should cover 50 percent of the total cost for a four-year degree from a public university.
So how do you start saving? A popular choice is the 529 plan, a specialized savings account designed to pay for higher education. These offer tax and financial benefits and are sponsored by individual schools or the state. Learn more about 529 plans at finra.org.
In addition to college savings plans, there are several other investing options to consider: mutual funds, ETFs, and CDs. Let’s break these down.
Mutual funds essentially use money from investors (you) to purchase stocks and/or bonds. These are managed by a “portfolio manager”, who decides how to invest this money. Anyone who purchased a share of the mutual fund receives a cut of the profits.
Exchange-traded funds (ETFs) are very similar to mutual funds—the main difference being how they are traded. ETFs trade throughout the day, like stocks, so investors can buy or sell quickly based on the market. Mutual funds can only be bought and sold once per day.
Lastly, a Certificate of Deposit (CD) is a savings account that is insured by the federal government. They typically have a higher interest rate than most traditional savings accounts and must remain in the bank for a specific amount of time to reach full value—which helps curb your urge to withdraw early.
And as a AAA member, you receive preferred member rates on all CD terms, from 3 months to 10 years. Open an account in minutes at AAA.com/Deposits or call a 24/hour customer service representative at (888) 728-3230 to take advantage of these exclusive-member savings.
CDs and other deposit accounts are offered through Discover Bank, Member FDIC. The article and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.
Courtney Armpriester is Brand Management Coordinator for AAA Ohio Auto Club.