Raising children can be an expensive endeavour. As per the latest information from The Brookings Institution, the cost of raising a single child till the age of 17 averages at over $300,000. This figure doesn’t even include the significant cost of higher education. Establishing a college fund for your children can often be a guaranteed way to facilitate a smooth transition into a successful adulthood. But how do you go about saving for your child’s college education?
THE COST OF COLLEGE EDUCATION
As per U.S. News’ annual survey, the average college tuition fee for the academic year 2022-2023 fluctuated between $39,723 (for private institutions) and $10,423 (for public in-state institutions). Assuming the current trends continue, college costs are only expected to rise. Costs generally increase twice as fast as the inflation rate every year and this trend is predicted to stay. Here’s an estimate of what you might have to shell out for your child’s or grandchild’s college education once they’re ready.
IF YOU’RE SEEKING WAYS TO SAVE UP FOR COLLEGE, CONSIDER THESE OPTIONS:
Preparing for your child’s college fund is a great financial move that demands meticulous planning and commitment. Here are a few practical steps to help you get started:
START SOONER rather THAN LATER
Starting to save early gives your money more time to grow. Ideally, you should set up a college fund right after your child’s birth. With the power of compound interest and consistent contributions, the fund will have ample time to increase, meaning you wouldn’t need to save as much each month or year to reach your savings target.
BECOME FAMILIAR WITH THE COSTS
The cost of college education can cover a range of items, including some unexpected ones. By gauging college costs, you can compare various schools and look into ways to lower your expenses. This will help you arrive at a target savings amount.
OPT FOR THE RIGHT SAVINGS STRATEGY
There are various savings options to consider if you’re planning to start saving for your child’s college education early. Look into tax-advantaged accounts like 529 plans, they offer tax benefits and are flexible for education-related expenses. Coverdell Education Savings Accounts (ESA) are another option worth considering.
ENABLE AUTOMATIC SAVINGS
Set up automatic payments into your college savings account to help grow your savings. Each monthly deposit contributes to the total saved amount while compound interest adds even more to your funds. Automatic savings help your account grow as much as possible while ensuring consistent contributions and eliminating the temptation to divert the funds elsewhere.
SEEK FAMILY CONTRIBUTIONS
Inform other family members about your savings goals. They may choose to contribute on occasions like birthdays or other special events. For birthdays, you could include a link to your child’s gift page in the e-invite and mention that contributing to the 529 savings account as a gift option.
INVEST SMARTLY
Adopt a diversified investment strategy that aligns with your risk tolerance and time horizon. College savings schemes offer multiple investment options. Remember to consistently review and adjust your investment strategy as required.
KEEP AN EYE ON SCHOLARSHIPS AND FINANCIAL AID
Keep yourself updated on potential scholarship or financial aid options. While these won’t replace your savings, they can help cushion some of the expenses.
WHERE TO INVEST YOUR MONEY?
Investing in a 529 savings plan or a state-sponsored investment account dedicated for school can be a worthy consideration for college investing. With 529 savings plans, you can utilize the withdrawn money for college, K-12 tuition and other qualifying educational expenses without having to pay income tax on any investment gains.
Alternatively, you might want to consider investing in Traditional and ROTH IRAs. The IRA is a tax-advantaged savings account designed for investments such as stocks, bonds, and mutual funds, and can be adjusted as per your requirements and goals.
Finally, custodial accounts under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), allow you to set up a trust fund for a minor.
TO CONCLUDE
While the cost of college education continues to climb, parents should prioritize early savings to capitalize on the advantages of long-term investment. Post determining the portion of their child’s college education they’re willing to pay for, they can decide their monthly contributions. They could consider a 529 savings plan, brokerage account or a prepaid tuition plan, but a 529 savings plan is likely to offer the most tax benefits and flexibility.
But remember, every family’s financial situation is unique, thus, your savings plan for your child’s college fund must be tailored to your specific needs and circumstances. Be sure to review and update your strategy as your family and financial situation evolves.
