Bringing up children is costly. The Brookings Institution’s latest data reveals that the total cost of raising a child from birth to 17 years old exceeds $300,000. This calculation does not even consider the significant costs of higher education. Establishing a college fund for your children is a proven strategy to guide them towards a successful adulthood. Are you questioning how you should set up a college fund for your kids?
THE FUTURE EXPENSE OF COLLEGE EDUCATION
The U.S. News annual survey exhibits that, for the 2022-2023 academic year, typical tuition fees range between $39,723 (for private institutions) to $10,423 (for public, in-state institutions). Unless there is a fundamental change in the way we finance education, these costs are likely to continue to increase.
The cost of college typically rises at uaboutouble the rate of inflation each year, a pattern that is likely to continue in the coming years. This implies that you should begin to anticipate increasing yearly expenses for tuition, fees, and room and board when your children or grandchildren are ready to start their college education, considering a steady 6% annual college cost inflation rate.
Here are several strategies to start saving for college:
STRATEGIES FOR BUILDING YOUR CHILD’S COLLEGE FUND
Setting up a college fund for your children requires strategic planning and commitment. Here are some practical strategies you can consider:
SAVE EARLY
Starting to save early allows more time for your money to grow. Ideally, starting a college fund when your child is born is the best approach. With compound interest and regular investments, the fund can grow significantly over time, reducing the amount you need to save each month or yearly to reach your objective.
UNDERSTAND THE EXPENSES
The cost of college isn’t limited to tuition; it encompasses a variety of expected and unexpected expenses. By understanding these costs, you can compare institutions and identify ways to minimize your expenses, giving you a target savings goal.
SELECT THE APPROPRIATE SAVINGS PLAN
Tax-advantaged accounts such as 529 plans offer potential tax benefits and flexibility for education-related expenses. They are an effective way to save for your child’s future education. Another option is the Coverdell Education Savings Accounts (ESA).
AUTOMATE YOUR SAVINGS
Automatic deposits into your college savings account can help your savings to compound faster. Regular monthly deposits will grow your overall savings, and compound interest will boost these savings further. Automating your savings ensures consistent contributions and reduces the temptation to divert the money elsewhere.
ENCOURAGE FAMILY CONTRIBUTIONS
Inform family members about your college savings goals. They may be inclined to contribute during birthdays, holidays, or other special occasions. For birthdays, consider adding a link to your child’s gift page in your digital party invitation, giving people the option to contribute to the 529 savings account.
MAKE SMART INVESTMENTS
Consider investing based on your risk tolerance and time horizon. Regularly reassess and tweak your investment strategy as needed.
IDENTIFY SCHOLARSHIPS AND FINANCIAL AID
Keep an eye out for possible scholarships or financial aid. These won’t replace your savings, but they can assist in covering some of the costs.
WHERE TO INVEST YOUR SAVINGS?
529 SAVINGS PLANS
Consider opening a 529 savings plan, which offers tax advantages, for investing in your child’s education. These plans have various types of mutual funds, bonds funds and ETFs. The tax benefits of these plans make them a popular choice for investing in college education. Contributions up to $15,000 are tax-free and your earnings grow tax-free.
TRADITIONAL AND ROTH IRAS
Consider investing in a Traditional or Roth IRA. An IRA is a tax-advantaged savings account that includes investments like stocks, bonds, and mutual funds. As your needs and goals change, you can adjust the investments in the account.
CUSTODIAL ACCOUNTS
UGMA or UTMA accounts allow you to establish a trust for a minor child or grandchild and are managed by you until the child reaches legal age. However, keep in mind that the child doesn’t have to use the money for educational purposes.
THE KEY TAKEAWAY
With the rapidly increasing cost of college, it is essential for parents to start saving as soon as possible to maximize their investment returns. Once you decide how much of your child’s college education you can afford to cover, you can determine how much you need to contribute monthly. Whether you opt for a 529 savings plan, a brokerage account, or a prepaid tuition plan, a 529 savings plan likely offers the best tax benefits and flexibility.
Each family’s financial situation is unique. Therefore, it’s crucial to customize your college savings plan to your particular needs and circumstances. Make sure to regularly revise and adjust your strategy as your family grows and your financial situation changes.
