Making your money work for you. As you begin to build up your nest egg, consider if your first priority should be contributing to your tax-advantaged retirement savings plans. Why? Unlike college, there are no potential grants, scholarships or loans for financing your later years. Employer-provided retirement plans such as 401(k)s offer special advantages including an immediate reduction in your current income taxes due to the tax deferral on your contributions, tax-deferred growth of your investment earnings and a possible employer match. And remember, your retirement plans work harder when you’re able to invest the maximum amount permitted. Consider whether you can max out on all contribution limits.
The right mix. While initiating the college savings process is a crucial first step, how you invest your college savings is equally important. Historically, investing in stocks (also called equities) have produced the highest long-term returns – although over shorter term periods, stocks also tend to experience more volatility than other investments. As college approaches, you may want to consider gradually shifting into less volatile and more conservative investments such as CDs or money market funds. If you invest through a 529 savings plan you may also have access to an age-based portfolio, which is a predetermined mix of investments that automatically adjusts from more aggressive choices to more conservative ones as a child nears college age.
Separate buckets. If you can make it work with your saving strategy, consider earmarking money specifically for higher education and keeping your retirement nest egg separate and growing for your future. Remember, most people finance college through a combination of savings, current income and loans. Just because your nest egg may be accessible, it doesn’t mean you need to tap into it.