Raising children is a considerable financial undertaking. The average cost of raising a child from birth to 17 years old exceeds $300,000, based on recent statistics from The Brookings Institution. This figure doesn’t include the substantial cost of higher education. Therefore, constructing a college fund for your kids is a reliable method to support their transition into successful adulthood. Are you wondering how to build a college fund for your kids?
THE TRUE COST OF COLLEGE
Analysis from the U.S. News annual survey revealed that the average tuition for the 2022-2023 academic year oscillates between $39,723 for private colleges and $10,423 for public, in-state colleges. Unless the state of education funding changes, expect college fees to continue climbing.
Unfortunately, college expenses inflate at roughly double the rate of general inflation each year, a trend likely to persist. Therefore, it is essential to account for the following projected annual costs of tuition, fees, and accommodation for your future college-goers:
Below are effective methods to create a college fund:
STRATEGIES TO BUILD YOUR CHILD’S COLLEGE FUND
Creating a college fund for your children is shrewd financial planning but demands long-term commitment and meticulous planning. The following are practical steps you might consider:
SET UP A SAVINGS PLAN EARLY
Saving early enables your money to multiply over time. Ideally, begin a college fund once your child is born. With compound interest and steady contributions, your savings will gradually accumulate, reducing the need for significant monthly or annual savings to reach your target.
UNDERSTAND THE VARIOUS EXPENDITURES
College expenses encompass more than you may initially envision. By fully comprehending the costs, you can compare institutions and discover cost-saving methods, helping you set achievable savings targets.
SELECT THE RIGHT SAVINGS PLAN
Early savers have access to several constructive savings plans. Consider tax-advantaged accounts like 529 plans or Coverdell Education Savings Accounts as potential solutions.
AUTOMATE YOUR SAVINGS
Automating deposits into your college savings account encourages consistent growth. Regular deposits and the magic of compound interest will boost your savings. This approach ensures regular contributions and reduces the tendency to divert funds elsewhere.
INVOLVE FAMILY CONTRIBUTIONS
Keep close ones informed about your college savings goals. They might be delighted to contribute during birthdays, holidays, and other special occasions.
INVEST SMART
Adopt a diversified investment plan in line with your risk tolerance and time frame. Make it a habit to review and adjust your investment plan periodically.
SEEK OUT SCHOLARSHIPS AND FINANCIAL AID
Be on the lookout for scholarships and financial aid. Although these options won’t substitute for savings, they can nonetheless help lighten the financial load.
EXPLORING INVESTMENT OPTIONS
529 SAVINGS PLANS
523 savings plans are a powerful savings vehicle, enabling tax-free withdrawals for college or K-12 tuition and other qualifying educational expenses. These favored investments offer mutual funds, bonds funds, and ETFs. Not only do they offer up to $15,000 in tax-free contributions, but they also allow your earnings to grow tax-free.
TRADITIONAL AND ROTH IRAS
IRAs (Individual Retirement Accounts) allow you to hold investments such as stocks, bonds, and mutual funds in a tax-advantaged savings account. You can modify the account’s investments as your goals evolve.
CUSTODIAL ACCOUNTS
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are two types of custodial accounts. These accounts allow you to save money or assets in a trust for a minor. The trustee has the responsibility of managing the account until the child turns of age (18 to 21, varying by state).
IN CONCLUSION
With soaring college expenses, it is prudent for parents to commence saving early and potentially gain more from their investments. Parents should decide on the proportion of their child’s higher education fees they are prepared to cover and then design a plan for regular contributions. Choices range from 529 savings plans, brokerage accounts to prepaid tuition plans but 529 plans typically offer the most tax benefits and flexibility.
Remember, every family has a unique financial situation; therefore, it’s crucial to shape your college fund plan to match your specific circumstances and needs. Routinely review and adapt your strategy as your family expands and your financial setting evolves.
