Raising children is not cheap. Current data from The Brookings Institution shows that the average cost of raising a child from birth to 17 years old exceeds $300,000. This figure does not cover the considerable cost of higher education. Provide a solid foundation for your child’s success in adulthood by setting up a college fund. But how do you do that?
1. Understand and consider the costs of college education:
According to an annual survey by U.S. News, tuition fees for the academic year 2022-2023 range from an average of $39,723 (private colleges) to $10,423 (public, in-state colleges). With the current trend of annual increases in college costs roughly double the inflation rate, these figures are expected to continue rising.
2. Exploring options for savings:
To secure a decent college fund for your children, it would be wise to start saving as early as possible, ideally from their birth. By systematically investing on a monthly or yearly basis, you can take advantage of compound interest. This allows your savings to grow over time and reduces the amount you need to save each month.
It also pays to understand the complexities of college costs. Beyond tuition fees, there may be other expenses to consider as well. Having clear insight into these costs helps you set a realistic savings target.
For early savings, you could explore tax-advantaged accounts like 529 plans and Coverdell Education Savings Accounts (ESA). They offer potential tax benefits and flexibility for education-related expenses.
Setting up automatic deposits into your account builds your savings steadily and effortlessly.
Reveal your college savings ambitions to family and friends. During special occasions like birthdays, they might express their support with monetary contributions to the 529 savings account.
Investment strategy is also essential. Depending on your risk appetite and time horizon, consider diversified investment options and adjust your strategy regularly. Seek out potential scholarships or financial aid opportunities. Though they may not replace your savings, they can significantly help with the costs.
3. Where to invest your money:
Consider investing in a 529 savings plan or a state-sponsored investment account specifically for education purposes. With these plans, you can withdraw money for college and K-12 tuition and other qualified educational expenses tax-free.
Alternatively, you could consider investing in Traditional and Roth IRAs. These are tax-advantaged savings accounts that contain investments such as stocks, bonds, and mutual funds.
Custodial accounts like Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts present another option. These accounts let you save money and assets for a minor until they reach the age of majority, at which point they assume ownership of the account.
Remember that the cost of college is rapidly increasing. Therefore, early savings and sound investment strategies are essential for parents to provide for their child’s higher education fully or partially.
Everyone’s financial circumstances are unique. Therefore, it’s essential to tailor your savings and investment plan to your specific situation and be ready to adjust it as circumstances change.
