Bringing up children is a costly affair. In fact, data from The Brookings Institution reveals that on average, expenses for one child from birth to 17 years old surpass $300,000. This figure doesn’t even begin to touch upon the substantial costs associated with tertiary education. Establishing a college fund for your children can significantly aid their transition into successful adulthood. Wondering how to start saving for your child’s college education?
THE EXPENSES ASSOCIATED WITH COLLEGE EDUCATION
Based on an annual survey by U.S. News, during the 2022-2023 school year, the average college tuition ranged from $39,723 for private institutions to $10,423 for state colleges. Unless there’s a transformation in the way higher education is funded, these costs will continue to escalate. College costs normally rise at about twice the rate of inflation annually, a trend projected to persist. Therefore, here’s what you can anticipate college tuition, fees, and lodging expenses to be by the time your children (or grandchildren) are college-bound (based on a 6% steady inflation rate of college costs).
In case you’re exploring methods to save for college, here are some potential solutions:
STRATEGIES FOR COLLEGE SAVING
Starting a savings plan for your children’s college education is a prudent move that needs meticulous planning and commitment. Follow these practical steps:
1. START EARLY: Begin saving as soon as possible – the sooner, the better. Ideally, start with the birth of your child. That way, thanks to compound interest and regular monthly or yearly investments, your money has a long period to accumulate, and the amount you need to save each month or year is less to reach your target.
2. UNDERSTAND THE COSTS: College costs involve a range of different elements, including some unexpected ones. By understanding these, you can compare schools and look for ways to decrease your expenses, giving you a clear saving target.
3. PICK THE RIGHT SAVINGS PLAN: If planning to start saving for your child’s college early, various savings accounts can help you invest for their future. Discover tax-privileged accounts like 529 plans which offer potential tax benefits and flexibility for education-linked expenses. Another suitable plan to consider is the Coverdell Education Savings Accounts (ESA).
4. SET UP AUTOMATIC SAVINGS: Automatic deposits into your college savings account make your savings grow. Each monthly deposit enhances your total savings amount, and compound interest amounts to even more savings. Make sure you set up this automatic saving to allow your account to amass as much as possible, ensuring regular contributions and reducing the likelihood of spending the savings on other expenditures.
5. FAMILY CONTRIBUTIONS: Notify grandparents and other relatives about your college savings goals. They might be willing to chip in for birthdays, holidays or other special events.
6. INVEST SMARTLY: Implement a diversified investment strategy based on your risk tolerance and investment period. Many college savings plans offer a variety of investment options. Continually review and adjust your strategy as required.
7. SEEK SCHOLARSHIPS AND FINANCIAL AID: Stay alert for potential scholarships or financial aid opportunities. While these won’t act as a replacement for your savings, they can help reduce some of the expenses.
WHERE TO INVEST YOUR MONEY?
1. 529 SAVINGS PLANS: If you’re saving for college, consider setting up a 529 savings plan. These state-sponsored investment accounts are used solely for funding educational costs. With a 529 savings plan, you can withdraw money for college and K-12 tuition along with other authorized educational expenses while avoiding income tax on investment gains.
2. TRADITIONAL AND ROTH IRAS: Think about investing your money in Traditional and ROTH IRAs. These tax-advantaged savings accounts can contain investments such as stocks, bonds, and mutual funds. You can manage investments in the account to accommodate your needs and objectives.
3. CUSTODIAL ACCOUNTS: The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts that allow you to put money or assets into a trust for a minor child or grandchild.
THE BOTTOM LINE
The cost of college is skyrocketing, yet beginning to save early can bring considerable return on investments.
After deciding what portion of their child’s college tuition they’re equipped to cover, parents can design a plan for their monthly savings. Options for investing range from a 529 savings plan, a brokerage account or a prepaid tuition plan, with the most tax benefits and flexibility most likely coming from a 529 savings plan.
Every family’s financial situation is unique, hence it’s crucial to modify your college savings plan for your children according to your specific necessities and circumstances. Keep reassessing and fine-tuning your saving strategy as your family expands and your financial situation develops.
