The cost of bringing up children is substantial, with the Brookings Institution reporting that the average spending for a child from birth till 17 years old surpasses $300,000. This estimate doesn’t even consider the pricey affair of higher education. Setting up a college fund for children is generally considered an effective way to secure their future. So, how should you start building your child’s college fund?
THE PRICE TAG OF COLLEGE EDUCATION
As per an annual survey by U.S. News, the 2022-2023 average tuition fee stood between $39,723 (for private colleges) and $10,423 (public, in-state colleges). As methods of paying for education remain unchanged, the cost of college continues to surge. The rise is roughly double that of the usual inflation rate annually and is expected to persist long term. Given a consistent 6% college cost inflation rate, here is what the tuition, fees, and boarding cost might come around to when your children or grandchildren are college-bound.
There are several ways to save for college. Here are a few suggestions:
STRATEGIES TO BUILD YOUR CHILD’S COLLEGE FUND
Planning and saving for your children’s college funds is a prudent financial move that requires strategic thinking and commitment. Here are some effective steps you can take:
BEGIN EARLY
The sooner you start saving, the more time your money has to accumulate. Ideally, you should begin the college fund as soon as your child is born. Regular investments coupled with compounded interest allow the fund to grow over an extended duration, thereby decreasing the monthly or yearly contribution to attain your savings goal.
KNOW THE EXPENSES
Understanding the college expenses, which can include unfamiliar costs, can help compare schools and uncover methods to reduce your expenditure. Having a target savings amount can also help in planning.
SELECT THE RIGHT SAVINGS TOOL
If you plan to initiate savings for your child’s future education early, several savings tools can assist. You may consider tax-advantaged accounts like 529 plans, which provide potential tax benefits and flexibility for education-related expenses. Coverdell Education Savings Accounts (ESA) are another viable choice.
AUTOMATE YOUR SAVINGS
By setting an automatic deposit system for your college savings account, your savings can steadily grow. Regular deposits increase your total savings, and compounded interest simply adds more. Doing this not only allows maximum growth of your account but also ensures consistency and prevents spending the money elsewhere.
INVOLVE FAMILY
Make sure your family is aware of your college savings goals. They might want to contribute during birthdays, holidays or other special events.
INVEST SMART
Based on your risk tolerance and time frame, consider a diversified investment strategy. Regularly review and alter your investment plan as necessary.
EXPLORE SCHOLARSHIPS AND FINANCIAL AID
Be vigilant about possible scholarships or financial aid opportunities. Receiving a college grant is free money. Despite not replacing your savings, these additional funds can help alleviate some costs.
WHERE TO INVEST YOUR MONEY
You may consider a 529 savings plan or a state-sponsored investment account when planning for college investments. These plans, offering substantial tax benefits, are specifically designed for education-related expenses. You can withdraw money for college, K-12 tuition, and other qualifying educational costs without paying income tax on any earnings.
Alternatively, traditional and Roth IRAs are tax-advantaged savings accounts where you can maintain stocks, bonds, and other investments. You have the flexibility to manage investments in these accounts and adjust as per your needs and goals.
For financial gifting purposes, Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts allow you to create a trust for a minor child or grandchild.
THE FINAL WORD
With the rapidly increasing cost of college education, it’s imperative for parents to start saving as early as possible for maximum benefits.
By determining the percentage of your child’s college education you’re willing to bear, you can craft a plan for their monthly contributions. Options like 529 savings plans, brokerage accounts or prepaid tuition plans are available, with a 529 savings plan likely to provide the most tax benefits and flexibility.
Your strategy for accumulating the college fund should be custom-designed to match your unique financial scenario. Regularly review and adjust your savings strategy as your family expands and financial situation evolves.
