According to the investment firm Fidelity, the average family is on track to save only 29 percent of the total amount their child will need to pay for a college education by the time he or she graduates from high school. Part of the problem is that the average family has no idea how much they should be saving for their child’s college education. That is why Fidelity coined the “2K Rule of Thumb” for college savings. It helps parents better understand how much they should be saving at various ages of their child’s life.
What is the “2K” Rule?
The 2K rule focuses only on the amount of savings parents need to accrue to meet the goal of covering roughly half of annual college costs at a four-year public college (in-state).
The rule is simple. Multiply your child's age by $2,000. That tells you how much you should have saved already at that specific age to be on track to cover 50 percent of college costs.
For instance, if your child is seven years old, you would multiply $2,000 by seven and come up with $14,000. That is not the total you will need to have saved to pay for college, but the total you will need to have saved to be on track at that specific age. If you have more than that, you are in good standing. If you have less, you might want to save a little extra over the next few years to catch up. By the time your child is 18, you should have at least $36,000 saved to assist with college expenses.
How to Use It
To get more mileage from your money, the 2K rule needs to be only one of the methods you use to help your child save for college. Remember the amount of money you have invested in this plan may affect the needs-based financial aid your child can receive. It will not, however, reduce your child’s access to merit-based grants and scholarships for grades, academic accomplishments or special skills, for example. When used in combination with the 2K rule for saving, financial aid can take a healthy bite out of the costs of college.
The more methods you use to help pay for the costs of college, the more helpful the 2k Rule for saving becomes.
529 Plan Requirement
For the “2K Rule” to work to maximum benefit, you will need to invest the funds in a state-sponsored 529 savings plan. 529 plans allow your savings to grow tax-free, so long as at withdrawal, they are used to pay for qualified education expenses. If you leave it parked in a savings account, the interest you earn on the principal will be subject to federal tax.
The main thing to remember, when it comes to investing in your child’s education, is that you must do so early and consistently to enjoy solid returns. CNBC reports that starting a savings plan early is the number one thing parents must do if they want to achieve their college savings goals. The earlier you begin to save, the more you will benefit from compounding and the earning of interest. That means you will have to put less money in the account each month to meet your goal than if you put in $36,000 when your child turns 18.
The 2k rule helps you accomplish your savings goals by showing you where you are at any given point in comparison to where you should be. You will also be able to track how long you have to reach your ultimate goal of being financially prepared to pay for a solid college education.