We Set Our College Savings Number (Free Money Finance)

November 08, 2006

We Set Our College Savings Number

Fresh off setting our retirement number a couple months ago, my wife and I decided to attack part two of the financial tsunami waiting for us all and set our college savings number -- the amount we want to have saved up by the time our kids go to college. Here's what we did:

1. We discussed our philosophy of college -- how much we'd pay versus what we'd expect the kids to pay/earn through grants and scholarships, the type of schools we thought our kids were likely to consider, the costs associated with attending schools like that in 10 years (when our kids are off to college), and so on. Obviously, we needed to get on the same page with all of these issues before we could decide the financial ones.

2. I then set up a spreadsheet that uses the following items as inputs in calculating our college savings:

The cost of an "average" college education today.
The rate at which college costs will increase each year.
The amount we currently have saved for each child's college education.
The annual return/growth we expect on these funds between now and the time the kids enter college.
The additional amount we expect to save every year between now and the time the kids enter college.
The annual return/growth we expect on these funds between now and the time the kids enter college.

3. I then set up a series of calculations that displays the following information:

The year.
The age of each child in each year.
The cost of four years of college in that year (adjusted for inflation.)
The value of the amount we already have saved in each year.
The value of additional contributions we'll make in each year.
The total value of the college savings we'll have available in each year.

4. Then I played with the inputs listed in #2 (I was pretty conservative with most of them -- erring on the high side for costs and low side for investment returns and so on) to get a set of outputs that I felt accurately represented what we wanted to save based on the costs. This then let me know what we need to save every year between now and college age so our kids have enough to cover their college education.

A few extra thoughts on this:

1. Just like our retirement number, this one will be reviewed every couple of years or so and updated for progress and reality checks.

2. Our plan assumes we'll save half of the costs of college. However, these costs are fully loaded -- we did not take out any financial aid or any sorts of tips that we'll likely use to reduce the cost of college (like those found at Save 50% on Education Expenses), so we should be more than covered.

3. Based on the above, it looks like we'll need to save about $4,000 total (not for each child, but total) every year between now and the time they reach 18 years old. This is primarily due to the fact that we have a good amount already saved up. This said, I hope to save $10,000 or so for the next few years and then be done with it. I'd rather save early and then let the power of compounding carry us the rest of the way.

4. For more of my thoughts on saving for college, see Best of Free Money Finance: College and Education Posts.

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