When to Start Saving for a Child’s College Education

When to Start Saving for a Child's College EducationChildren are expensive, we have a 1 year old daughter, and diapers, toys, clothes, and daycare add up very quickly. But one of the larger expenses associated with kids is their college education, which means that considering how that will work is imperative. Consider the following points about saving for a child’s college education.

For the 2015-2016 school year, the average in-state on-campus public school costs came in at $19,548 for a four-year public school. That number climbs to $34,031 when a student is attending school out of state. Private schools cost an average of $43,921, while a two-year public commuter school was “just” $11,438.

Realistically, the earlier that you can start saving for your child’s college the better. The longer you allow money sit in a 529 or other investment account, the more interest you can make from it. If you start saving money when your child is just a baby, $5,000 can turn into $19,980 over a period of 18 years. assuming an 8% interest rate. If you started with $5,000 and contributed $100 each month, that account would balloon up to $68,500 by the time your kid is ready for college. But the truth is that the monthly payments are more important than the initial amount, so even if you don’t have $5,000 to stash away now, all hope is not lost. If you had $0 saved now but contribute $100/month for the next 18 years, that would result in a whopping $48,500!

Start Saving as Soon as Possible

The simple answer to the question about when to start saving is to start saving as soon as possible. But in reality, that’s not always possible and there are other priorities in many people’s lives that push saving off until that promotion or raise comes. If you’ve got a child who is 10 years old, you’d need to sock away $350/month for 8 years to hit the $48,500 mark. This just underscores why saving early and often is so important!

Of course, not everyone needs to pay for their children’s college education. I think it’s very important for students to have some “skin in the game” when making college decisions, and it can often lead to your kids taking school more seriously. Hopefully they make smart decisions and go to cheaper schools, but taking out some student loans to cover the cost of education doesn’t need to be avoided at all costs.

But Always Put Yourself First

Most parents would prefer that their kid isn’t entering the job force with debt hanging over their head. As many as 70% of students do end up taking that route. For example I had about $25,000 in student loan debt when graduating. Have your child investigate scholarship opportunities, too!

Keep in mind that your own savings are important to protect as well. You should not be giving up your own retirement account to help pad the college fund. While student loans are always available, the same does not hold true for a retirement fund. Another option is that if you’re in a more secure financial situation when your child has graduated, you can help pay off the student loans.

4 Simple Ways to Prepare for the Financial Future of Your Children

You want the best for you children, not just while they are living under your roof but for long after they leave the nest as well. The years fly by, so it is important to have a plan in place to help teach and educate them in the ways of the world. Naturally, this involves a great deal of financial planning in order to ensure that they have the resources to be successful when they set out on their own. No parent likes to think about the day when their children leave home, but consider the following four simple ways to help prepare for your children’s financial futures.

College Planning Begins Now

Far too many young adults today are saddled with a lifetime of student loan debt. As a parent, you might not be able to afford the full cost of a college education today, particularly given the skyrocketing expenses for tuition, room, and board in some countries. That being said, you can begin planning now to pay for that education with a 529 tax advantaged savings plan. This will help provide much of the money your children will need when the time comes for them to go away to college, which means they will have to rely less on those pesky student loans. This will set them up for a bright beginning to their financial future as they will not be riddled with debt immediately upon graduation.

Open a Roth IRA

While teenagers do not generally think about retirement at their age, you can help show them that it is never too early to plan. In fact, as soon as your children begin to work you can help them open a Roth IRA and allow them to start seeing the value in investing. This is a great educational opportunity, as you can do this right alongside them. You can set them up with an account, help them make regular deposits that they are comfortable with, and then show them how they can monitor its progress.

A Roth IRA has several advantages at this stage in life as opposed to a traditional IRA. Since we are looking at a long time span before retirement, and your child likely does not earn enough to pay much in the way of taxes anyway, the tax-deferred status of a traditional IRA just does not make much sense. To take advantage of tax savings, it is much more valuable to contribute to a Roth IRA and have your children enjoy the tax-free status decades down the road when they begin drawing out of their retirement. With an estimated 4 in 10 Americans currently without any retirement savings to speak of, this is one of the best ways that you help prepare for your children’s financial future.

Help Supplement Their Savings with Bonds

To teach the value of diversification, consider savings bonds as a way to help supplement your children’s financial portfolio. While they may not offer the same type of interest as stocks or mutual funds, they continue to hold great value as a long-term investment. This is what you are aiming for, as you want your children to learn that some of their savings simply should not be touched for years. Savings bonds will help accomplish just that objective.

Open a Bank Account

As soon as your child begins to earn any money at all, whether from an allowance, cleaning up the neighbor’s yard, or their first job, you can open a savings account for them at the bank. Let them decide how much money to put away each time they get paid. Do not discount online banks either, as many offer accounts for children with very low fees attached. Your children can then access their account at any time and watch their savings grow over time. If you start this early enough, your children might just have enough saved up for rent or a down payment on a house once they get ready to move out.

The Future is Now

As you can imagine, there are many ways to plan for your children’s financial future. The key is to begin today. Do not wait, as those precious years will fly by and you can wake up one day realizing that you have missed your opportunity. Financial education is a gift that your children will grow up to appreciate. Starting with these four strategies can help you rest easier at night knowing that you have done what you can to help the financial future of your children be bright.

Investing Tools and Techniques: Short Selling and Ratio Strategies for Stock Market Magic

The standard approach to picking stocks is to try to guess which companies are going to increase in value over time. There’s an alternative approach you can take, however; it’s called “shorting” and it involves doing the exact opposite. Instead of betting on which companies are going to win, you’re trying to identify the ones that are going to lose.

Why Try to Pick Losers?

Shorting a stock is a means to make money when you feel certain that a company is going to lose value. It’s a particularly valuable technique in down (or “bear”) markets, when general confidence is low and stocks tend to be declining in value in an unusual way. They’re actually a big part of how hedge funds operate; the “hedge” in question is the use of a series of short positions as a counter to the longer positions in their portfolio.

Statistically speaking, shorting can be seen as a bit more risky than traditional investing as markets tend to trend upward more often than not, and since you’re effectively taking out a loan rather than holding the stock directly. It’s more than just a day trading scheme, however. Shorting serves an important market regulation function in keeping stocks from becoming too overvalued when an irrational “feeding frenzy” starts.

The process of due diligence in selecting stocks to short is really no different than in picking the ones you want to add to your long-term portfolio. So, for example, let’s say you were interested in investing in the solar power industry since that’s an area that has been expanding quickly in recent years and still has considerable growth potential. Scouring sites that cover news about solar, we learn that battery storage technology is making great strides and poised for a major breakthrough. If a specific company is about to introduce a revolutionary battery product, it might be a good time to short their direct competitors.

How Exactly Does Short Selling Work?

The basic concept is actually pretty simple:

  • Instead of buying the stock you are interested in outright, you borrow shares of it from a broker, with the promise of replacing that same amount of shares later.
  • You then immediately sell those shares at the current price.
  • If everything works according to plan, the stock then drops in value.
  • You then buy the shares back at the lower price and return them to the broker, pocketing the profit (minus fees and interest).

The Risks of Short Selling

Of course, the big risk here is that your expectations are wrong and the stock rises in value instead of falling. In this case, you are a bit more vulnerable than you would be if you were simply holding direct ownership of a declining stock. Since you’re borrowing the stock, you’ll have to pay interest on it over time, usually about 2%. Even if the stock does decline, it has to decline at a certain rate to keep up with your interest and any fees or it won’t be profitable.

Brokerages generally do not set a time limit for how long one can hold a short position, but they also usually have the freedom to demand the return of the shares at any time they choose. Naturally, they will call in the shares if the stock starts rising significantly from the shorted position value to protect their investment. This means you have less freedom to “ride it out” with a shorted position if things don’t go the way you expect, though it is relatively rare for a brokerage to actually do this (and will likely only happen if there is a very unusual and sharp increase in value).

It’s also important to know that not every stock is available for shorting. Usually, the smaller a company is, the more likely you will not be able to short their stock. This happens because smaller companies can be so negatively impacted by shorting that they will not be able to conduct enough business to recover from the loss in value it causes. The biggest regulation imposed in this area is the “alternative uptick rule“, which prevents further shorting of a stock that has dropped more than 10% in value in one day’s trading.

So What Is The “Short Ratio”?

If you look at major financial websites, you’ll often see a “short ratio” mentioned for each individual stock. The short ratio simply expresses the number of days it’s currently expected to take to cover all the short positions, but it also indirectly tells you the number of shares currently being shorted by investors as compared to the number of shares available overall.

How do you get the number of shares being shorted? It’s pretty easy — just multiply the current short ratio by the 30-day average daily volume of shares, a number also generally provided to you by the major financial sites.

Successful Shorting

Reading the short ratio to determine how a stock is going to move is a complicated topic that takes added knowledge about other circumstances the company in question is in. Generally speaking, however, you can use it as a quick gauge of investor sentiment towards a company. The most basic read is that a high short ratio often indicates general confidence in the stock is dropping. There are exceptions, however, and understanding those exceptions (and the circumstances they’re found in) is the key to successful short selling.

Eleanor Cole works as a personal finance consultant. She shares her wisdom online with her articles as well as participating on social media channels.

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