How Compound Interest Easily Helps You Grow Your College Savings

The cost of college can seem insurmountable. It's not, for lots of reasons: from government financial aid and college scholarships, to attending lower cost 2- or 4-year universities, there are a lot of ways to cut down your cost. But the best thing you can do for yourself or your student is to start saving right now, especially if your student is still young. While it is never too late to start saving, starting early and using time to your advantage can have an outsized benefit on the amount you ultimately are able to pay out of pocket for college.

The reason? Compound interest.

If you are saving in an account such as a 529, your money is being invested, and will grow with the market, tax-deferred. So you'll have not just what you are able to put away, but also the interest that accrues on it. Even more than that, with compound interest, your accrued interest will also accrue interest, further increasing your savings. This is a powerful tool that grows more powerful the longer you are investing, meaning you do best when you start earliest.

As an example, let's say Julie starts saving $50 per month shortly after the birth of her child. Jonathan waits until his child is 7 years old to start saving. Feeling a bit under the gun, he starts to save $100 per month. They have both invested in a 529 plan and taken advantage of compound interest. Assuming the same rate of return for both parents, here's how they will stack up when each of their students begin college:

Julie will have $21,536, $10,800 of which will be her contributions with $10,736 interest earned.

Jonathan will have $19,798, $13,200 of which will be his contributions, with only $6,598 interest earned.

While both parents did pretty well here, the effect is clear. Julie saved less of her own money for college costs, with a lower monthly contribution, but has more to spend in her 529 account. Even by doubling the monthly contribution amount, Jonathan wasn't able to make up the difference in what Julie saved, because he started 7 years later.  Such is the power of compound interest and saving early.

What does this mean for you? If you haven't yet started saving for college, start now! Even setting aside a small amount can make a significant impact. And even if your kids are older, don't worry. Compound interest will still help you grow your savings, no matter when you start. Any Amount You Can Save for College is a Win.

Learn more about the benefits of saving for college