Teaching Tool of the Month: College Savings Calculator

Every month we are highlighting one teaching tool that has our stamp of approval in helping parents or grown ups put the FUN in teaching the fundamentals of finance.

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Item: College Savings Calculator

Creator: Future Funders

Saving for your child's college education can be a daunting task.

With the ever-increasing cost of higher education, it's important to start thinking about saving for your child's college education today (we have a clever way to do this and also make your kid a millionaire for less than $1 per day).

It’s and obvious statement but the earlier you start, the better off you'll be. One of the tools that can help you think about this as well as help you teach the kids about saving, investing, and compound interest is our College Savings Calculator.

For this reason, we wanted to highlight the calculator as our Teaching Tool of the Month for April.

Using The Calculator

Using the College Savings Calculator is easy. Simply input some basic information such as your starting amount of savings, how many years until your child attends college, and the monthly contributions you can make.

In addition, there are a few assumptions you will need to put in such as the annual return rate on your investments as well as sitting down and thinking about what the cost of college may be by the time your kid is ready to go (here is some help).

Lastly, you need to assume the number of years your child will be in college or what kind of college they might attend to help you think about what the future value of your money will actually be buying (here our our views on whether or not an Ivy League Education is worth the cost).

Teaching The Kids

Once you have entered your numbers into the calculator and come to a reasonable conclusion, it’s time to use it to start teaching the kids about compound interest (we also have a free downloadable worksheet to help).

One of the most powerful tools at your disposal when it comes to saving for your child's education is compound interest. Compound interest is the interest earned on both the principal amount and the interest accumulated over time. In other words, the interest earned on your savings is reinvested, and you earn interest on the interest earned.

The power of compound interest can be illustrated by the following example: if you were to save $100 per month for 18 years with an average annual return of 8%, you would end up with approximately $49,000.

However, if you were to save the same amount for 25 years, you would end up with approximately $84,000. That's the power of compound interest at work (using compound interest and the power of 72 can also be a handy way to teach your kids when their investment will double).

On other way to start to teach younger kids about compound interest as well as encouraging them to save and invest would be “The Parent Bank” method.

It works like this:

• For money your child decides to save, let them know that if they save it for a period of time that you will give them “interest.”

• The amount can be up to you but we would not necessarily tie it to reality (ex. if they save $5 this week they would earn another $1 from you)

• Do this with them repeatedly and always make sure you deliver the agreed upon amount. Doing so will help them see the power of compound interest as well as delayed gratificaiton (one of the most important lessons in all of finance).

Saving For Education

Once you finish with the calculator, it’s time to actually think about how you are going to save for your kid’s education.

It's important to note that there are several different ways you can save (and not all are listed below).

One popular option is a 529 college savings plan, which is a tax-advantaged investment account specifically designed for education expenses. Another option is a Coverdell Education Savings Account (ESA), which is also a tax-advantaged investment account that can be used for education expenses.

Regardless of which savings plan you choose, it's crucial to start saving early and consistently.

Even small contributions can add up over time, thanks to the power of compound interest as noted above.

It's also important to re-evaluate your savings plan regularly and adjust your contributions as needed based on changes in your financial situation or your child's education plans.

Final Thoughts…

We wanted to highlight our College Savings Calculator this month as it can be a great way to teach the kids about the power of compound interest while also helping parents think about the future today.

There are many ways to plan and save for your kid’s education and as we say here often at Future Funders, we don’t have a monopoly on knowledge. The more you plan and think about important decisions like this now, no matter how you choose to plan, is what is important.

Should you know of a great teaching tools that have helped you we would love to hear about it. Shoot us a note here.