The Rules for Successful Savings

No savings plan is foolproof; there are way too many variables, some of which rest on your side of the table (such as how much, when, and where you save), and others over which you have absolutely no control (for example, federal monetary policy, which generally defies any sort of reasonable explanation).

No matter how little you understand about why interest rates are so low and mutual fund fees are so high, you ultimately bear the responsibility for the success or the failure of your savings program. This chapter highlights some main strategies that may enable you to save enough to see one or more children through college without resorting to loans.

Pay into your savings plans first and regularly

Every financial advisor will tell you to do this, but it's not as easy as it sounds. Your savings programs stand the best chance of succeeding if you provide them with more, rather than less, raw material: money.

To successfully save any money anywhere, you really have to impose some discipline on yourself and on your budget. There's just no getting around that fact. If you find that you're unable to put money away on a regular basis, now is the time to accept some help in making sure that you really save money.

If you're already having deductions made from your paycheck for a retirement plan, you know how easy it is not to spend money that you never receive. And you probably also get some real satisfaction from seeing the size of that account grow. See whether you can make the same sort of paycheck deduction into either a Section 529 plan or into U.S. Series EE or Series I savings bonds. Although both of these deductions are made using after-tax dollars (unlike your retirement account contributions), the paycheck you receive will already have these amounts taken out, and you'll know that whatever money you receive will be yours to spend on your monthly bills.

Be as generous as you can in funding your savings accounts. You'll soon find that you adjust your spending accordingly once you know that a certain amount of money is leaving your account every month for this new savings venture.

Understand your investments

Don't ever let yourself be talked into putting money into an investment that you just don't understand. If you read a prospectus (the document any company must provide investors and prospective investors that explain what the investment is and how it works) and you just don't get it or you think it's not for you, trust your instincts and stay away. If, on the other hand, you can see how the wheels in a certain investment turn and they seem reasonably well oiled and connected, by all means consider that particular investment on its merits.

Don't ever be afraid to ask advice, but know that accepting advice doesn't absolve you of responsibility.

If something looks fishy, sounds fishy, and smells fishy, chances are good you're not buying a plum.

Change investments when necessary

Everyone miscalculates, and so will you. Don't assume that, because an investment's value is dropping, it will recover and go on to achieve fame and fortune. That type of wooly thinking is what keeps lotteries profitable and casinos in business.

Stay Current on tax law changes

You may think that ongoing changes to the tax code don't really affect your tax-deferred or tax-exempt college savings accounts. You're wrong. Even though you may not begin tapping into these accounts for many years, the current changes may well impact how you choose to save.

For example, the decrease in tax rates on long-term capital gains and corporate dividends may make you decide to put your non-tax-deferred or exempt savings into either individual stocks or stock-based mutual funds instead of keeping them in savings accounts, bonds, or real estate. Of course, when Congress finally wakes up and realizes the actual cost of this particular tax reduction and reinstates higher rates on these forms of income, you'll also want to be ready to readjust how, and where, your money is invested so that you obtain maximum benefit from your savings and from any tax deferrals or exemptions you may be entitled to.

Be realistic about investment returns

You may have earned 20 percent, 30 percent, or even 100 percent per year on your investments in the late 1990s, and that probably felt pretty good. With those rates of returns, you had to save only relatively small amounts out of your current earnings to achieve Harvard for each of your 16 kids and a fully paid retirement in Monte Carlo.

Reality is a bit different, and the stock and bond markets have retreated from fantasyland to a place where more reasonable average rates of return of between 4 percent and 8 percent reside. Your savings will earn real money with those rates of return, but you won't get rich on them without some serious infusions of cash out of your pocket. If Harvard and Monte Carlo are your goals, you need to do more than wait for the stock markets to expand exponentially if you're realistically going to achieve them.

Don't count on Aunt Sadie's inheritance

Reality dictates that, while Great-Aunt Sadie can't take it with her, she's probably going to spend most of it before she goes, and no matter what she's told you, whatever's left may well be going to help save the North Atlantic salmon.

Ask questions of the experts

No one can possibly know and understand every type of investment and every effect of every tax code provision on your savings. That's okay. No one expects you to be an expert in every area of your life.

What's not okay is to pretend understanding when you just don't get it. Find someone reliable — a professional, a family member, or friend — who does get it, and pick that person's brain. Stop the person when the answers get too technical. Make the person back up and go over the information again and again, until you do understand it. Don't accept the assumption that you should know what someone else is talking about, and don't ever feel like you're an idiot because you just don't get it.

Whoever said that ignorance was bliss was mistaken. Ignorance in any of your finances may well lead to disaster.

Learn from your mistakes

Making mistakes is what makes people human, and you're no exception. You will screw up in your savings programs, especially at the beginning, and you can't escape that reality. And that's all right — don't apologize to yourself or to anyone else.

At the same time, don't make the same mistake twice. If you lose money on an investment and might have limited the losses by selling sooner, learn from that. If you're failing to save as regularly or as much as you should, change your ways. If you miss the timing on a tax code change and so pay more tax than you would have had you been more attentive, that's okay. Once. Any of these errors can happen to anyone, but the success of your savings program depends on your making them only once and then doing better the next time.

Crying over lost opportunities and lost money only creates an ocean of tears; fixing what went wrong may help repair the damage.