Saving for College: How to Determine the Amount Needed

Saving for college is no easy task. Everyone knows that a college education is very expensive and you need to start saving for college early. But how much money will you need to save each month to reach your goal? This was one of the most important things I learned in Dave Ramsey's Financial Peace University class. Read on to learn how to calculate how much you should be saving now in order to pay for college in the future.

Saving for college is all about planning. Start by determining how much the college of your choice will cost per year, in today's dollars. According to collegboard.com, for the 2006-07 academic year, the average cost per year of a four year private college was $22,218, and the average cost per year of a four year public college was $5,836. This is the first step in saving for college. For our example, let's assume you want your child to attend a private college that costs $25,000 in today's dollars.

Then, assuming you are planning on a four year college, multiply this amount times four. So, $25,000 times 4 equals $100,000. This is the amount you would need to save if your child was attending college right now. But chances are that your child is years away from going to college, so you must take inflation into account when saving for college. We will assume an inflation rate of 4% in our saving for college plans.

So, if we are going to be successful saving for college we will need to invest our savings with an interest rate that is better than the rate of inflation. So, with inflation assumed at 4%, you will not get very far investing in a savings account earning 3% at your local bank. To make any real progress in saving for college you should aim for an interest rate around 12%. This way when you adjust for the 4% inflation you will still net 8% interest. Achieving an interest rate close to 8% will be very important in saving for college. Do your research and you should be able to find some mutual funds that are earning this kind of interest.