Bringing up children is a costly venture. Based on recent data by The Brookings Institution, the total costs for a child from birth through 17 can exceed $300,000. This figure does not even consider the significant cost of tertiary education. Establishing a college fund for your children is often a reliable way to set them up for a successful future. Wondering how to go about saving for your child’s college fund?
THE EXPENSE OF A COLLEGE EDUCATION
Based on an annual survey by U.S. News, the average tuition fees for the 2022-2023 academic year range from $39,723 (private colleges) to $10,423 (public in-state colleges). This cost is likely to continue to increase unless there’s a drastic change in how education is financed.
Each year, college fees tend to rise at about twice the rate of inflation; a pattern that is projected to continue indefinitely. Taking into account a regular 6% inflation rate in college costs, here’s a projection of each year’s tuition, fees, and living expenses by the time your child or grandchild is ready for college. If you’re considering ways to save for college, here are some possible strategies.
SAVING FOR YOUR CHILD’S COLLEGE FUND: A HOW-TO GUIDE
Planning and saving for your child’s college education is a smart financial decision that requires consistency. Here are some applicable steps you can consider:
BEGIN EARLY
The earlier you start, the more time your savings have to accumulate. Ideally, you should commence a college fund as soon as your child is born. With the power of compound interest and regular monthly or annual contributions, your fund has a chance to increase over time, allowing you to save less each month or year to meet your savings goal.
UNDERSTANDING THE EXPENDITURES
College expenses encompass several things, including some which may not be immediately apparent. By getting acquainted with the college costs, you can compare different institutions and explore options to reduce your expenditure, which will help define your savings target.
SELECTING THE RIGHT SAVINGS METHOD
If you intend to get an early start on saving for your child’s college education, consider using investment vehicles such as tax-advantaged accounts like 529 plans. These offer potential tax benefits and are quite flexible for education-related expenses. Coverdell Education Savings Accounts (ESA) are also worth considering.
AUTOMATE YOUR SAVINGS
Automatically depositing money into your college fund allows your savings to consistently grow. Each deposit increases your total savings, with compound interest boosting your savings even more. Automatic saving limits the possibility of spending the money elsewhere and ensures stable contributions.
INVITING FAMILY CONTRIBUTIONS
Sharing your college savings targets with grandparents and other relatives could encourage them to contribute on birthdays, holidays or other special occasions.
INVESTING SMARTLY
Consider a diversified investment plan based on how much risk you’re willing to tolerate and your time frame. College savings plans offer a range of investment options. Regularly reviewing and adjusting your investment strategy helps maintain its effectiveness.
OPPORTUNITIES FOR SCHOLARSHIPS AND FINANCIAL AID
Keep track of possible scholarships or financial aid. Winning a college grant is essentially free money that could help mitigate some costs.
WHERE TO INVEST?
529 SAVING PLANS
If you’re saving for college, you might want to consider a 529 savings plan, which is a state-sponsored investment account solely used for investing in education. 529 plans allow individuals to withdraw money for college and K-12 tuition and other eligible educational expenses.
TRADITIONAL AND ROTH IRAS
Investing in Traditional and Roth IRAs could be another sound strategy. An IRA is a tax-advantaged savings account where you can invest in stocks, bonds, and mutual funds. You can adjust your investments as your needs and goals evolve.
CUSTODIAL ACCOUNTS
Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts that let you set aside money and/or assets for a young relative. As the trustee, you manage the account until the child reaches adulthood (18 to 21 years, depending on the state).
FINAL THOUGHTS
College costs are soaring, but parents can start saving early to maximize their returns. Once you settle on the portion of your child’s college expenses you want to pay for, you can decide on a monthly contribution plan. Investing in a 529 savings plan is usually most beneficial due to the tax advantages and flexibility it offers. Remember, however, that there’s no one-size-fits-all, and your savings plan needs to align with your particular financial circumstances. Regularly review and modify your strategy as your family enlarges and your financial position changes.
