Bringing up children isn’t cheap. In fact, looking at data recently shared by The Brookings Institution, an average child costs more than $300,000 to raise from birth to 17 years. And this figure does not even include the significant costs of higher education. A college fund is a tried-and-true method for easing your children into a successful adulthood. Wondering how to start and build such a fund?
THE PRICE TAG OF COLLEGE EDUCATION
A U.S. News annual survey indicates the 2022-2023 school year’s average tuition will be as high as $39,723 for private colleges and as low as $10,423 for public in-state colleges, Unless there’s a major shift in educational financing, these fees will only continue to skyrocket.
The cost of college education inflates at roughly double the general inflation rate annually; this trend is predicted to persist indefinitely. Let’s break down what the future cost of tuition, fees, and room and board might look like for your child (or grandchild), assuming a constant 6% college cost inflation rate:
If you’re exploring strategies to afford college, consider the following tips:
HOW TO BUILD YOUR CHILD’S COLLEGE FUND
Strategically setting aside money for your children’s college funds is a sensible financial move that requires thorough planning and determination. Here are some practical steps:
START EARLY
Beginning your savings journey early allows your money to accumulate over a longer period. The ideal time to start increasing the college fund is essentially at the birth of your child. Consistently investing with compound interest lets the funds mature over time, making reaching your savings goal less of a monetary burden per month or year.
COMPREHEND THE EXPENSES
The major components of college expenditure can be diverse and sometimes unexpected. Understanding these expenditures can help identify savings goals and explore ways to mitigate costs.
SELECT AN APPROPRIATE SAVINGS METHOD
Begin early in investing in educational savings vehicles like the 529 plans or Coverdell Education Savings Accounts (ESA), which offer potential tax advantages and flexibility for education-related expenses.
AUTOMATE YOUR SAVINGS
Set up automatic transfers into your savings account to grow your fund. Over time, compounded interest along with regular deposits will build up your savings. Automatic deposits ensure consistent contributions and minimize the temptation to withdraw.
FAMILY CONTRIBUTIONS
Prompt grandparents and other relatives about your savings plan. They might consider adding to the fund on special occasions.
INVEST SMARTLY
Consider tailor-made investments that suit your risk tolerance and investment timeframe.
SCHOLARSHIPS AND FINANCIAL AID
Stay updated with scholarships or financial aid opportunities. These funds can somewhat counterbalance the burden on your savings.
WHERE SHOULD YOU INVEST?
529 SAVINGS PLANS are tax-efficient saving plans designed primarily for education expenses. These plans introduce a range of investment options growing your money tax-free.
TRADITIONAL AND ROTH IRAS are tax-advantaged individual retirement accounts that can also support your children’s college expenses.
CUSTODIAL ACCOUNTS (UTMA/UGMA) are trusts implemented for the benefit of a minor child or grandchild, managed by a trustee until the child reaches the age of maturity.
THE BOTTOM LINE
The cost of higher education is on the rise; starting to save at the earliest is key to maximizing your return on investment. Once parents decide what proportion of their child’s college education they’re willing to cover, they can establish a plan for their monthly savings. Investing in a 529 savings plan, a brokerage account, or a prepaid tuition plan are all options, the 529 savings plan typically offering the most tax benefits and flexibility.
Always recall that financial situations differ from one family to another. Thus, it’s key to personalizing savings plans for your children’s college fund relative to your unique needs and circumstances. Revisit and tweak your strategy as your family expands and your financial circumstances shift.
