Having children is a substantial financial commitment. Recent figures from The Brookings Institution indicate that, on average, a child’s upbringing from birth to 17 years old will cost in excess of $300,000. This does not even take into account the significant cost of further education. Setting up a college fund is typically a reliable strategy for ensuring your child successfully transitions into adulthood. So, how can you go about saving for your child’s college fund?
UNDERSTANDING THE PRICE OF COLLEGE EDUCATION
A yearly survey by U.S. News reveals that the average tuition for the 2022-2023 academic year ranged from $39,723 at private colleges to $10,423 at public, in-state colleges. Unless there is a change in how education is funded, these prices will only continue to increase.
The cost of college tends to rise at double the annual rate of inflation, a trend that is projected to persist for the foreseeable future. If a constant annual inflation rate of 6% for college costs is assumed, here’s the expected amount to pay for tuition, fees, and room and board when your kids (or grandkids) are ready for college:
If you are considering ways to save for college, consider the following options:
STRATEGIES FOR DEVELOPING YOUR CHILD’S COLLEGE FUND
Saving for your children’s college funds is a prudent financial decision that demands careful planning and perseverance. Here are some practical measures to consider:
BEGIN ASAP
Starting to save early allows your money to accumulate over time. In an ideal world, you would open a college fund as soon as your child is born. By consistently investing each month or year, the funds get a chance to grow over a longer period, and you can achieve your savings goal without having to save as much each month or year.
COMPREHEND THE EXPENSES
Understanding the cost of college helps you make a comparative analysis of institutions and explore cost-reduction strategies. This way, you will determine a target savings figure.
SELECT AN APPROPRIATE SAVINGS METHOD
For early saving for your child’s education, consider savings methods such as tax-advantaged accounts like 529 plans, which provide potential tax benefits and flexibility for education-related expenditures. The Coverdell Education Savings Accounts (ESA) are another option to consider.
ESTABLISH AUTOMATED SAVINGS
By setting up automated deposits into your college savings account, your savings will consistently grow. Each monthly deposit will bolster your total savings, and compound interest will further enhance your savings. Automated savings means your account can grow as much as possible and helps to mitigate the temptation to spend the funds elsewhere.
ENCOURAGE FAMILY CONTRIBUTIONS
Let grandparents and other family members in on your college savings plans. They may be happy to help out on birthdays, holidays, or other momentous occasions. During birthdays, include a link to your child’s gift page in the party’s digital invitation and let them know that contributing to the 529 savings account is an option.
INVEST STRATEGICALLY
Assess a diversified investment strategy based on your risk tolerance and timeline. Many college savings plans offer an assortment of investment options. Regularly reevaluate and adjust your investment strategy as required.
RESEARCH SCHOLARSHIPS AND FINANCIAL AID
Stay informed about prospective scholarships or financial aid opportunities. While these won’t replace your savings, they can help reduce some of the costs.
INVESTMENT OPTIONS TO CONSIDER
If you’re investing for college, consider a 529 savings plan or a state-sponsored investment account solely for educational investment. 529 savings plans offer a variety of different funds such as mutual funds, bonds funds, and ETFs. These are usually recommended for college investing due to their tax benefits: You can add up to $15,000 tax-free (for single taxpayers) and your earnings will accrue tax-free.
Traditional and ROTH IRAs are also worth considering. An IRA is a tax-beneficial savings account where you maintain investments such as stocks, bonds, and mutual funds. The account’s investments are customizable, and you can fine-tune them as your needs and goals evolve.
Other options to consider are custodial accounts such as those under the Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA). As the trustee, you manage these accounts until the child comes of age, at which point they gain full control of the account.
IN CONCLUSION
While the cost of college is rising rapidly, parents are advised to start saving as early as possible to maximise their investments. After deciding how much of their child’s college education costs they can cover, parents can formulate a plan based on monthly contributions, choosing from 529 savings plans, brokerage accounts, or prepaid tuition plans. A 529 savings plan is usually the most beneficial due to its tax benefits and flexibility.
Remember, all financial situations are unique, so it’s crucial to tailor your plans to your individual circumstances. Regularly reviewing and adjusting your strategy is just as essential as your family and financial situation evolves.
