Raising children can be a costly endeavor. Findings from The Brookings Institution indicate that the average child costs over $300,000 to raise from birth to 17 years old. This estimate doesn’t even take into account the substantial cost of higher education. Setting up a college fund for your children is generally a sound strategy for preparing them for a successful future. Curious about how to save for your child’s future education?
UNDERSTANDING COLLEGE EXPENSES
A yearly survey by U.S. News reports that average tuition costs for the academic year of 2022-2023 span from $39,723 (for private institutions) to $10,423 (for public, in-state institutions). And unless significant changes in education funding occur, these figures are likely to continue rising.
Historical trends indicate that college expenses tend to increase approximately twice as fast as the rate of inflation every year. This tendency is expected to persist into the foreseeable future. If college costs continue to inflate at the steady rate of 6%, here’s what you might expect to pay for each year of tuition, fees, room, and board when your children (or grandchildren) are ready to embark on their college journey:
HOW TO PLAN FOR COLLEGE SAVING
Savings for your children’s college funds is a smart financial decision, but it requires meticulous planning and consistent effort. Here are some actionable steps to consider:
START EARLY
The earlier you start saving, the more time your money will have to accumulate. Ideally, you should start a college fund when your child is still an infant. Through the power of compound interest and disciplined periodic investments, your savings have the chance to grow across a longer timescale, so you don’t need to set aside a massive amount each month or year to reach your designated saving goal.
CALCULATE THE EXPENSES
The cost of attending college encompasses more than just tuition; it includes a variety of components, some of which may surprise you. By understanding these costs, you can compare schools and explore potential ways to reduce your expenses, thereby determining an optimal saving target.
PICK THE RIGHT SAVING VEHICLE
To start saving early for your child’s higher education, you should consider different saving vehicles dedicated to this purpose. Tax-privileged accounts like 529 plans can help you contribute to your child’s future education while offering potential tax advantages. Another good option to consider is the Coverdell Education Savings Account (ESA).
AUTOMATE SAVINGS
By scheduling automatic transfers into your college savings account, you allow your savings to grow organically. Each monthly deposit not only increases your total savings but also compounds over time, resulting in even greater savings. This tactic also ensures consistent contributions and removes the temptation to use the funds elsewhere.
GET FAMILY INVOLVED
Let grandparents and other relatives know about your college savings goals. They may be open to contributing during birthdays, holidays, or other special occasions. Including a note in your digital party invites for birthdays and explaining that contributions to the 529 savings account are a welcomed gift is a great idea.
INVEST SMARTLY
A diversified investment strategy, tailored in accordance with your risk tolerance and time frame, is essential. Many college savings plans offer a range of investment options. Regularly reviewing and revamping your investment strategy is a good practice.
WHERE SHOULD YOU INVEST YOUR MONEY?
DETERMINE WHERE TO INVEST
When saving for college, consider opening a 529 savings plan. This state-sponsored investment account is geared towards investing for education expenses. With 529 savings plans, you can withdraw money tax-free for college and K-12 tuition as well as other qualified educational costs.
529 savings plans offer mutual fund options, bond funds, and ETFs. They are typically recommended for their tax benefits: you can contribute up to $15,000 tax-free (if you’re a single taxpayer), and your earnings will grow tax-free.
CONSIDER OTHER INVESTMENT OPTIONS
Traditional and Roth IRAs are also worth consideration. An IRA is a tax-privileged account where you can hold investments like bonds, stocks, and mutual funds. You have the freedom to choose your investments and adjust them as your objectives shift.
CUSTODIAL ACCOUNTS
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts that let you place money and assets in trust for a minor. As a trustee, you manage the account until the child reaches adulthood. At that point, they attain full control of the account and can use the funds as they see fit, without restrictions on educational expenses.
THE BOTTOM LINE
Although the cost of college continues to skyrocket, it’s imperative for parents to start saving as soon as possible in order to benefit the most from their investments. Once you have decided what percentage of your child’s college expenses you’re willing to cover, you can devise a plan for your monthly contributions.
Remember that every family’s financial situation is distinct, hence it’s crucial to adapt your college savings plan to your specific circumstances. As your family evolves and your financial situation fluctuates, an ongoing review and adjustment of your savings strategy is recommended.
