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2k Rule of Thumb — Secret to Saving for Your Child’s College Education

About 50% of Americans say they need education when it comes to how to best save for college, with seven-in-ten seeking more specific guidelines to define how much they should be saving. The difficulty in identifying how much parents should be setting aside may contribute to the fact the average family is currently on track to save only 29% of the amount of college costs they intend to cover by the time their child graduates high school. 

Fidelity has designed a new College Savings ‘2K Rule of Thumb’ and customizable College Savings Calculator, providing parents with the ability to estimate how much they should be saving—whether they’re just getting started or already thinking about campus tours.

Taking into account that the average American family leverages multiple sources to fund college costs, the ‘2k Rule of Thumb’ focuses solely on savings. Assuming a goal of covering 50% of annual college costs for a four-year public school from savings, the rule is simple:

Multiply your child’s age by $2,000. Applying this rule, if your child is seven years old:

$2,000 x 7 years old = $14,000

This total represents how much you should have saved to date to be on track, assuming you will continue saving at the same rate and that your child will be age 18 come time to head to campus.

While the ‘2K Rule of Thumb’ is a simple way for parents to calculate general savings guidelines, for those who may want to cover more or less of college costs, the rule can be flexible. Taking advantage of Fidelity’ new mobile-friendly and easy to use College Savings Calculator can help families tailor the rule to apply to their specific situation. By answering a few basic questions, the interactive calculator can quickly provide a customized view of how current college savings measure up and how much more they need to put aside moving forward to meet their goals.

• How Much Will It Cost? When it comes to the cost of college, the price difference between public and private schools can be substantial. According to College Board, the current cost of a four-year in-state public college is estimated to be $20,090 per year versus an annual cost of $45,370 for a four-year private college. By inputting the cost of one year of school in today’s dollars, our savings rule of thumb and calculator applies how those costs may grow by the time your child heads to campus.

• How Much Will You Cover from Savings? Fidelity research shows parents continue to be committed to helping their children pay for college, in some cases influenced by their own experience with student loan debt, and others simply wanting to help their children get off to the best financial start they can. While parents often take the lead in covering college expenses, it is still the case that most families don’t cover the full cost from savings. Parental and student income, grants, loans and scholarships all play a role as well.

• How Much Have You Saved So Far and How Long Do You Have Until College? Whether you started saving early or you’re catching up, increasing your savings and ensuring it is invested appropriately can provide the best opportunity for growth to achieve your goals.

How to Jump Start Your College Savings

The good news is that more parents are motivated to save than ever before, according to Fidelity research and customer data. More families have started saving, are saving in dedicated college savings accounts and have established a plan to help them stay on track with their college goals. In fact, Fidelity 529 college savings plan account openings are up 36% through the first quarter of 2017, compared to the same time last year.

For families looking for additional ways to kick their savings into high gear, check out these ways to give your college account a boost:

• Beat Procrastination: The best way to stop putting off saving for college? Make saving a habit by automating your monthly savings. Your college savings plan provider can help automate your college savings contributions so that regular monthly payments are transferred directly from your bank account. Or consult the human resources office at work for help, as many companies offer direct deposit as an option to put part of your paycheck into a college savings account. The easier you make it to save, the less likely you may be tempted to skip contributing.

• Dedicate an Account to College Goals: Consider using a dedicated account to save for future higher education expenses. One option is a tax-advantaged account such as a 529 plan, which allow you to invest savings that can grow over time, while account earnings can be withdrawn federal income tax-free for a range of college expenses. Saving in a dedicated account can also help families stick to their savings plan and feel more confident in reaching their goals. Fidelity research finds that 88 percent of 529 plan owners have a financial plan in place to meet their college savings goals, and on average, have saved nearly $12,000 more than families without a 5297.

• Invest Your Best: One key to reaching your college savings goals may be to adopt an age- appropriate strategy that reflects your child’s time horizon to college. Each year, revisit your plan to make sure the asset allocation suits your needs. 529 college savings plans can offer a range of investment options from low-cost index funds to actively managed age-based funds, which provide an age-appropriate asset allocation as your child grows up.

• Dedicate to Innovate: Whether it’s cutting out one restaurant visit a month, committing a percentage of a tax refund or paycheck bonus, or earmarking earnings from cash back credit cards, there are creative ways to save a little more each month that can significantly impact the growth of your college savings account over time.


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