Developing a plan to fund your child's
education is one of the most significant financial decisions you will
make. According to the College Board the average annual cost of
attending college, including tuition, books, room, and board, is
$11,338 for an in-state public college or university and $24,996 for a
private college or university. In recent years, college costs have
risen 4% to 5% per year.
While a variety of options-including
scholarships, grants, work-study programs, and loans-are available to
help defray some of these costs, most families will still need to rely
on a college savings plan.
Creating an optimal investment plan
for your child's education will depend on several factors:
whether you are saving for a private
or a public education,
the number of years before your child
will begin college,
the amount you can invest now,
the amount you can add periodically
to your investment,
and your personal risk tolerance.
The longer your time horizon, the more
aggressive your investment portfolio should be. For example, a family
beginning to save for a newborn's college education might invest
heavily in stocks or stock mutual funds in an effort to outpace
inflation and maximize the growth of their investment. Stocks expose
investors to greater risk than bonds or money market accounts, but
have traditionally offered the highest return over time.
As your child gets older and your time
horizon decreases, you'll want to adjust your asset allocation in
order to conserve your principal. This means that you'll shift the
focus of your portfolio toward more conservative investments such as
bonds and cash equivalents, which tend to offer greater stability but
lower returns than stocks.