One of the best ways to build wealth over time is to invest. Investing can help you amass wealth at a faster rate than you would likely be able to otherwise. This holds true whether you are saving for retirement, or whether you are saving up for college.
If you are looking for a way to increase your chances of helping your child pay for college, you can use a 529 college savings plan to set money aside. While there is the risk of loss, there is also the potential to build up some wealth — especially if you start relatively early.
Five years ago, I opened a 529 account for my 10-year-old son. I contribute monthly, and it has been gratifying to watch the account grow over time. By the time he uses the account, when he is 20, there will be 15 years worth of savings and growing with the power of compound interest.
As you consider your 529 plan options, here are three things to keep in mind:
1. Choose a Plan that is Versatile
Look for a plan that is fairly versatile in terms of where you can use the money. Most 529 plans are set up by states. However, just because a 529 college savings plan is set up by a particular state, it doesn't meant that you have to attend school in that state. Many plans allow you to contribute if you live out of state, and you can also use the money to pay expenses at thousands of educational institutions across the country.
Make sure that the plan you choose is versatile, so that your child has more options when it comes to deciding which school to attend. Look for a versatile plan, with fewer restrictions.
2. Look for a Variety of Investment Options
One of the reasons I like the 529 plan I use for my son is that there were a number of investment options to choose from. The plan offered a number of index funds and ETFs. Some plans only offer a few investment options, so you are limited. This can be very disappointing, especially if there is a particular fund that you are interested in. Choose a 529 plan with a variety of investment options that fit your needs. Simple investments, like index funds and ETFs, can give you a big advantage, while offering a degree of diversity, and a lower risk. Don't choose a plan that limits you to investments that you aren't thrilled about.
3. Avoid Plans with High Fees
Just as costs are coming down for various funds, it's also possible to find 529 plans with low fees. Compare the fees charged by different plans. The higher the fees, the lower your real returns. While you can't completely avoid fees, you can reduce what you pay in fees. You can save on fees when you choose low-cost ETFs and index funds for your 529 plan. Before you commit, look at the fee schedule so that you understand what you will pay for the privilege of investing.
Chances are that you can find a 529 plan that offers you versatility, various investment options, and low fees. Many states are trying to make their plans attractive to investors, and that is to your advantage. Do your homework, and you will be more likely to find a solid 529 for your child's college education money.
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