Bringing up a child can be a costly affair. From birth to the age of 17, the average expenditure on a child exceeds $300,000, based on latest information from The Brookings Institution. And this figure doesn’t even factor in the substantial cost burden of further education. Establishing a college fund for your child is usually a reliable strategy to ensure a smooth transition into a successful adult life. Want to know how to build a college fund for your child?
THE EXPENSE OF ATTENDING COLLEGE
The U.S. News annual survey reports that for the academic year 2022-2023, the average tuition fee ranged from $39,723 for private colleges to $10,423 for public, in-state colleges. As things stand, it’s likely that college costs will continue to inflate. College costs usually rise approximately twice as fast as the general rate of inflation every year – a trend that is set to remain for the foreseeable future. Here’s an idea of what your children (or grandchildren) will be expected to pay in terms of tuition, fees, and room and board when they’re ready to go off to college (assuming a steady 6% college cost inflation rate):
LOOKING TO SAVE FOR COLLEGE? HERE ARE SOME POSSIBILITIES:
HOW TO GROW YOUR CHILDREN’S COLLEGE FUNDS
Planning and setting aside money for your children’s college funds is a sound financial choice. Let’s take a look at some useful steps that you can take:
START NOW
The sooner you begin saving, the better your money will grow. Ideally, you should start saving for a college fund when your child is born. Thanks to compound interest and monthly or yearly investments, your funds can grow over a lengthier timeframe, reducing the amount you need to save each month or year.
GET TO GRIPS WITH THE COSTS
Understanding the full costs of college, including some less obvious ones, will allow for more informed school choices and cost-reducing strategies. This understanding will also help you to identify your savings target.
PICK THE RIGHT SAVINGS TOOL
If you’re looking to save for your child’s college early, various savings vehicles can assist you in investing in your child’s future education. 529 plans, for instance, could offer potential tax advantages and adaptability for educational expenses. Another option worth considering is the Coverdell Education Savings Accounts (ESA).
SET UP AUTOMATIC SAVINGS
By organizing automatic deposits into their college saving account, you can enhance your savings. Every monthly deposit will boost your overall savings amount, and compound interest can contribute further to this. So, start automatic savings now and watch your account grow. It will also minimize the chances of spending that cash elsewhere.
ENCOURAGE LOVED ONES TO CONTRIBUTE
Let grandparents and other family members know about your college savings goals. They might be open to helping out for birthdays, holidays, or special events.
INVEST STRATEGICALLY
Think about a balanced investment strategy based on your risk tolerance and time before withdrawing. Many college savings schemes provide various investment options. Regularly review your strategy and make adjustments as required.
SEARCH FOR SCHOLARSHIPS AND FINANCIAL AID OPPORTUNITIES
Keep an eye out for scholarships or financial aid options. A college grant is like free money. Although these won’t replace your savings, they can help reduce some of the costs.
WHERE SHOULD YOU INVEST YOUR FUNDS?
529 SAVINGS PLANS
If you’re saving for college, opening a 529 savings plan could be a sound decision. With 529 savings plans, you can use the withdrawn money for college and K-12 tuition alongside other qualifying educational costs, without having to pay income tax on any gains from the investment.
TRADITIONAL AND ROTH IRAS
Another possibility might be to invest in Traditional and ROTH IRAs. An IRA is a savings account with tax advantages that contains investments like stocks, bonds, and mutual funds.
CUSTODIAL ACCOUNTS
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are trusts for a minor child or grandchild where you manage the account until the child becomes an adult. At this point, they gain control over the account and can use the money however they please,
THE SUMMARY
College costs are soaring, but parents can mitigate this by starting to save as early as possible. Once parents have decided how much of their child’s college education they’re willing to cover, they can layout a plan for monthly contributions. They can choose to invest in a 529 savings plan, brokerage account, or prepaid tuition plan. However, a 529 savings plan is likely to yield the most tax benefits and flexibility. Each family has unique circumstances, so, remember to customize your saving plan accordingly. Continually review and adjust your plan as your family expands and financial situation evolves.
