Raising children can come with hefty costs. Based on recent data from The Brookings Institution, an average total cost from birth until 17 years old can exceed $300,000 per child. This cost excludes the significant expenses associated with tertiary education. To ensure that your children have a financially stable start to adulthood, it’s common to establish a college fund. Wondering how to go about it?
ALLOCATING FUNDS FOR COLLEGE EDUCATION
Information derived from an annual survey by U.S. News suggests the average college tuition for the 2022-2023 academic year ranges from $39,723 for private institutions and $10,423 for public, in-state colleges. Unless the way education is financed undergoes a significant overhaul, it’s safe to expect these figures to keep climbing.
The inflation rate of college costs is usually twice the overall inflation rate, a pattern anticipated to persist indefinitely. Here are some projected costs for future college students given a steady 6% inflation rate for college costs:
WORKING TOWARD THE COLLEGE FUND
Building up your child’s college fund is a sound financial endeavor that demands strategic planning and commitment. Here are some actionable steps you can undertake:
BEGIN ASAP
The sooner you start saving, the more time your investments have to multiply. Ideally, the commencement of a college fund coincides with the birth of your child. The magic of compound interest coupled with regular deposits made monthly or annually allows the fund to increase over a lengthy duration, decreasing the amount needed to save per month or year to achieve your target.
KNOW THE EXPENSES
College fees encompass a wide array of items, including some surprise costs. Familiarizing yourself with these expenses lets you make informed choices when comparing schools and finding ways to minimize costs. This knowledge also helps in setting a reasonable savings target.
SELECTING THE APPROPRIATE SAVINGS TOOL
If you want to prioritize early saving for your child’s tertiary education, several saving tools are available. Opt for tax-advantaged accounts like 529 plans, which offer potential tax benefits and flexibility for education-related expenses. Consider Coverdell Education Savings Accounts (ESA) as another alternative.
AUTOMATED SAVINGS
Arrange for automatic transfers into your college savings account to ensure consistent growth. Each monthly deposit adds to your total savings, and compound interest boosts this growth even further. By automating your savings, you ensure consistent contributions and reduce the temptation to divert the funds.
INVITE FAMILY TO PARTICIPATE
Enlighten family members about your educational saving targets. They might choose to contribute during birthdays, holidays, or other special events. Inform them about this option through a note in digital party invitations, explaining that contributions to the 529 savings account are a welcomed gift.
INVEST SMARTLY
Adopt a diversified investment strategy that aligns with your risk tolerance and time frame. College savings plans typically offer a range of investment choices. Monitor and adjust your investment plan as circumstances demand.
UTILIZE SCHOLARSHIPS AND FINANCIAL AID
Stay alert for scholarships or financial aid opportunities. Receiving a college grant can help alleviate your savings since these funds don’t need to be repaid.
INVESTMENT OPTIONS: WHERE TO PUT YOUR MONEY
529 SAVINGS PLANS
If you’re saving for your child’s education, consider setting up a 529 savings plan. Such state-sponsored investment accounts function exclusively for education-related savings. The money you withdraw for college and K-12 tuition, among other qualified educational expenses, is exempt from income tax on any investment gains.
TRADITIONAL AND ROTH IRAS
You might also want to think about investing in Traditional and Roth IRAS. These tax-advantaged savings accounts are intended for stocks, bonds, and mutual funds. You have control over the investments in the account and can change them as your needs and goals shift.
CUSTODIAL ACCOUNTS
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts that allow you to set aside money and/or assets for a minor. As the account’s trustee, you manage it until the child becomes a legal adult, after which they have total control over the account and can use the funds as they see fit, including for non-educational expenses.
BOTTOM LINE
While the cost of tertiary education is climbing quickly, it’s crucial for parents to start saving as soon as possible to maximize investment returns.
Parents should decide how much they’re willing to contribute toward their child’s education, then formulate a monthly contribution plan accordingly. While there are several investment options, including a 529 savings plan, a brokerage account and a prepaid tuition plan, the 529 savings plan generally offers the most tax benefits and flexibility.
Every family’s financial circumstances are unique, so it’s essential to tailor your college fund savings plan to suit your individual needs. Continuously revisit and modify your strategy as your family expands and your financial situation evolves.
