It’s no secret that bringing up children is a costly affair. Recent studies by The Brookings Institution suggest that the average cost of raising a child to the age of 17 is more than $300,000. And that’s without considering the significant expense of higher education. Establishing a college fund for your children can be an effective pathway to ensure their successful transition to adulthood. Not sure how to go about it? Let’s explore together.
THE FINANCIAL IMPLICATIONS OF A COLLEGE EDUCATION
An annual survey by U.S. News suggests that the tuition fees for the academic year 2022-2023 could range from $39,723 for private colleges, to $10,423 for public, in-state colleges. Unless there is a fundamental change in how education is funded, these costs are expected to keep rising. The expense of college increases at about twice the rate of inflation per year, a trend likely to persist in the foreseeable future. We can break down the expected tuition, fees, and room and board expenses for future students, assuming a steady 6% inflation rate:
If you’re considering ways to secure funding for college, here are a few options:
HOW TO PREPARE FOR YOUR CHILD’S COLLEGE FUND
Planning a college fund for your children is a smart financial move that requires forward-thinking and determination. Here’s a guide to help you navigate through:
BEGIN SAVING NOW
It’s advantageous to start saving as early as possible, ideally from your child’s birth. The power of compound interest, combined with consistent monthly or yearly contributions, allows the funds to expand over an extended time, reducing the overall amount you need to save each month or year.
KNOW YOUR EXPENSES
The cost of college encompasses various items, some of which may surprise you. By having a clear understanding of these costs, you can gauge your affordability for different colleges and explore ways to cut corners where possible. This insight will also help define your savings goal.
PICK THE RIGHT INVESTMENT STRATEGY
Starting college savings early has potential benefits. Look into tax-advantaged accounts like 529 plans for potential tax benefits and flexibility. Another choice could be Coverdell Education Savings Accounts (ESA).
EMBRACE AUTOMATED SAVINGS
Automating deposits into your college savings account will allow your savings to grow. Every deposit made will boost your net savings boosted by compound interest. Setting up automatic savings now ensures consistency, and reduces the likelihood of money being spent elsewhere.
ENCOURAGE FAMILY ASSISTANCE
Let grandparents and other family members know about your college savings goals. They might be willing to contribute during celebrations or other special occasions. Consider adding a link to your child’s gift page in digital invitations and mention that they could contribute to the 529 savings account as a gift option.
EXPLORE OTHER FINANCIAL ASSISTANCE
Keep abreast of scholarship or financial aid options. They don’t replace savings, but can help reduce costs.
WHERE SHOULD YOU INVEST?
If you’re considering investing for college, look at 529 savings plans or state- supported investment accounts for school-specific investing. With a 529 savings plan, the money can be used for college and K-12 tuition, and other qualifying educational expenses, typically tax-free.
Traditional and Roth IRAs and custodial accounts such as Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts offer other viable solutions.
CONCLUSION
With the rapid increase in college costs, beginning to save early can offer more opportunities for investment growth. After deciding what percentage of their child’s college education they can fund, parents can formulate an action plan for their monthly contributions. Considering the tax benefits and flexibility, a 529 savings plan will likely offer the most advantages.
Remember that every family’s financial situation is different, so it’s crucial to personalize your child’s college fund savings plan according to your specific circumstances. Regular reviews and adjustments of your strategy as your family expands and your financial situation evolves, will keep you on track for achieving your objective.
