The cost of raising a child is hefty, averaging well over $300,000 from birth until they turn 17, as per recent data from The Brookings Institution. And this sum doesn’t take tertiary education expenses into account. Establishing a college fund for your kids can be an effective strategy to help them transition into a prosperous adulthood. Wondering how to start saving for your child’s college education? Let’s dive in.
UNDERSTANDING THE PRICE OF A COLLEGE EDUCATION
According to an annual survey by U.S. News, the average tuition for the 2022-2023 school year varied from $10,423 for state-owned, resident colleges to $39,723 for private institutions. Unless there’s a significant shift in how education is funded, these costs are predicted to rise. They tend to inflate approximately twice as fast as standard inflation rates each year; a trend likely to persist in the future. To prepare for this investment, you need to estimate the future tuition, fees, room and board expenses your child will face when they are ready for college (assuming a 6% steady college cost inflation rate).
PLANNING FOR YOUR CHILD’S COLLEGE FUND
Starting a college fund for your children is a prudent financial decision, but it requires meticulous planning and commitment. Here are some practical steps:
BEGIN SAVING EARLY
The sooner you start saving, the more time your money has to accrue. Ideally, set up a college fund at birth. Thanks to compound interests and regular contributions, the funds can mature over an extended period, meaning you won’t need to set aside as much each month to reach your-saving goal.
GRASP THE EXPENSES
Fully understanding college costs, including unexpected ones, allows you to compare schools and consider ways to cut costs. This knowledge will help you establish a savings target.
SELECT THE RIGHT SAVINGS OUTLET
To start early, consider tools like 529 plans and Coverdell Education Savings Accounts (ESA) that offer tax benefits and flexibility for education-related expenses.
ENABLE AUTOMATIC SAVINGS
Automatic deposits into your college savings account will steadily increase your total savings, enhanced by compound interest. It also ensures a consistent input and helps resist the urge to use the savings elsewhere.
INVITE FAMILY CONTRIBUTIONS
Let grandparents and relatives know about your college savings goals. They might be willing to throw in a gift for special events. For birthdays, consider providing a link to your child’s donation page in your e-invitation, suggesting a contribution to the 529 savings account as an optional gift.
INVEST PRUDENTLY
Develop a diversified investment strategy according to your risk tolerance and timeline. Regularly check and adjust your strategy if necessary.
RESEARCH SCHOLARSHIPS AND FINANCIAL AID
Keep an eye on potential scholarships or grants – that’s free money. Although they can’t replace savings, they can help reduce some costs.
CHOOSING AN INVESTMENT VENUE
529 SAVINGS PLANS
A 529 savings plan or a state-sponsored investment account used for education-related expenses is highly recommended for those saving for college. You can withdraw for college and K-12 tuition and other educational expenses tax-free.
TRADITIONAL AND ROTH IRAS
Consider a Traditional and ROTH IRA. It’s a tax-friendly savings account where you can keep investments like stocks and mutual funds.
CUSTODIAL ACCOUNTS
UGMA and UTMA accounts are custodial accounts that let you put money into a trust for a minor child. You manage the account until they reach the age of majority. However, they can use the money as they please.
IN CONCLUSION
The cost of college is skyrocketing but parents should start saving early to maximize investment returns. Once parents decide what ratio of their child’s education they aim to cover, they can devise a plan for their monthly contributions. Among options like a 529 savings plan, a brokerage account, or a prepaid tuition plan, a 529 savings plan often offers the most tax benefits and flexibility. Remember, each family’s financial circumstances are unique, hence it’s critical to customize your savings plan. Regularly review and update your approach as your family and financial conditions evolve.
