Sometimes people give financial advice that seems almost too easy to be true. Get going early. Remember to save often. Time should do the work. This is something parents have heard for decades, but most of them still wait. They wait until the child can walk, then talk, and finally start kindergarten. By that time, several thousand dollars in growth potential has already been quietly lost.
In the past few years, Vanguard’s financial advisors have been directly opposing this trend. Their reasoning is based less on philosophy and more on hard math. They have interesting data: if a parent opens a college savings account for their child at birth, puts $1,000 in at first, and then adds $100 every month, the parent will have about $41,866 by the time the child is eighteen, assuming a 6% annual return. If you do the same thing with a child who is five years old, that number drops to $25,840. It drops even more to $13,958 when you wait until age ten. Contributions the same. The return rate is the same. Only time changes things.
That difference of almost $28,000 between starting at birth and starting at age ten shows what compound growth looks like when you let it happen. The returns earn more returns, and so on over years that most new parents, who are tired and stressed out, don’t fully picture while they’re still figuring out when to go to bed and when their kids’ appointments are.
The 529 savings plan is still what Vanguard advisors recommend most often for this purpose. It has a real tax benefit: contributions grow tax-free, and withdrawals are tax-free as well, as long as the money is used for qualified education costs like books, computers, room and board, and tuition. A lot of states also give their own tax breaks on top of that. You can make one as soon as the child has a Social Security number. In other words, the account can exist before the baby has fully learned how to stand up on their own.
There may be other good choices as well, depending on the family’s situation. UGMA and UTMA custodial accounts don’t offer the same tax benefits, but they’re flexible, so the money can be used for anything, not just school costs if the child changes their mind. Coverdell ESAs are good for families who want to save for college and K–12 costs, but high earners can’t use them because they have higher contribution limits and income limits. It’s not hard to open any of these accounts. It takes less than thirty minutes to set up most of them online.
Parents don’t seem to be getting in the way of things. It’s a mix of different financial stresses and the feeling that college is so far away when a child is still in diapers. It’s still not clear if most parents don’t realize how much it costs to wait or just don’t see the data in a way that makes them feel urgent and connected. Vanguard’s college savings calculator tries to help by letting parents enter their child’s age, the type of school they’re thinking about, and an estimated inflation rate (tuition typically goes up by about 5% per year) to come up with a clear savings goal. When parents see a real number connected to a real time frame, the child’s behavior often changes.
Vanguard advisors don’t want to send the message that parents who started school late have already failed. It’s more useful than that: no matter where you are now, the best time to start was earlier, and the second-best time is now. It takes time and patience to see compound growth, but it also takes showing up, even if it’s not perfect, even if it’s late, and even if you only have $50 a month instead of $100. Math isn’t as strict as most people think it is. It just needs time to work, and not like most things in parenting, time is something you can’t get back.
