Saving for College: How to Determine the Amount Needed

Saving for college is no easy task. Everyone knows that a college education is very expensive and you need to start saving for college early. But how much money will you need to save each month to reach your goal? This was one of the most important things I learned in Dave Ramsey's Financial Peace University class. Read on to learn how to calculate how much you should be saving now in order to pay for college in the future.

Saving for college is all about planning. Start by determining how much the college of your choice will cost per year, in today's dollars. According to collegboard.com, for the 2006-07 academic year, the average cost per year of a four year private college was $22,218, and the average cost per year of a four year public college was $5,836. This is the first step in saving for college. For our example, let's assume you want your child to attend a private college that costs $25,000 in today's dollars.

Then, assuming you are planning on a four year college, multiply this amount times four. So, $25,000 times 4 equals $100,000. This is the amount you would need to save if your child was attending college right now. But chances are that your child is years away from going to college, so you must take inflation into account when saving for college. We will assume an inflation rate of 4% in our saving for college plans.

So, if we are going to be successful saving for college we will need to invest our savings with an interest rate that is better than the rate of inflation. So, with inflation assumed at 4%, you will not get very far investing in a savings account earning 3% at your local bank. To make any real progress in saving for college you should aim for an interest rate around 12%. This way when you adjust for the 4% inflation you will still net 8% interest. Achieving an interest rate close to 8% will be very important in saving for college. Do your research and you should be able to find some mutual funds that are earning this kind of interest.

Next you need to determine how many years you will be saving for college. The longer you have, the more interest you will be able to earn on your savings. Assuming that your child will go to college when he is 18, subtract his current age from 18. This is how many years you can plan to be saving for college. For our example let's assume your child is 8 years old and you have 10 years to be saving for college.

Lastly, to determine the monthly amount you need to be saving for college now at 8% interest, determine the 8% factor that corresponds to the number of years you have to save. The first number corresponds to the number of years you have to save, the number next to it indicates the corresponding factor you will use in your equation. (18 years = factor of .002083, 16 years = factor of .002583, 14 years = factor of .003247 , 12 years = factor of .004158 , 10 years = factor of .007470, 8 years = factor of .007470, 6 years = factor of .010867, 4 years = factor of .017748)

So, in our example, if your child is 10 years old, you will have 8 years to be saving for college. You would use the .007470 factor . Multiply this factor times the total cost of the college.

So, for our example, in order to save enough for your 8 year old to afford a 4 year private college that costs $25,000 per year in today's dollars, we would multiply 25,000 times 4 getting $100,000. Then multiply 100,000 times .007470, which equals $747. This is the amount you would currently need to be saving for college on a monthly basis to reach your goal.

Knowing how much you need to be saving for college is the first step toward getting there!