Having children can be a financial strain as by estimates, a single child might cost over $300,000–excluding college fees–from birth to age 17. Setting up college funds can be a great way to ensure your child’s future success. Thus, understanding how to save for these funds is crucial.
THE COST OF GOING TO COLLEGE
A U.S. News annual survey indicates that, for the academic year 2022-2023, the average college tuition ranges from $39,723 (private colleges) to $10,423 for public, in-state colleges. Unless the mechanism of educational financing changes, these costs will only continue to escalate. The inflation rate for college costs tends to be twice as high as the standard inflation rate each year, a trend expected to persist into the future. Therefore, when the time comes for your child or grandchild to attend college, assuming a steady 6% college cost inflation rate, expect to cater for tuition, fees, and other expenses yearly.
If you’re seeking tips to finance these college costs, here are some tips:
PLANNING YOUR CHILD’S COLLEGE SAVINGS
Securing your child’s future with a college fund demands meticulous planning and commitment. Here are a few steps you can follow:
START EARLY
The sooner you begin saving, the more substantial your financial growth potential. Ideally, the best time to start is when your child is born as the longer the funds have to grow, the lesser you have to save each month to achieve your goal. This, coupled with regular investment inputs, enables compound interest to work in your favor.
KNOW THE COSTS
A college education includes various expense items, some of which you might be unaware of. Knowing these costs helps streamline your comparison of schools and exploration of cost reduction options, thus setting a feasible savings target.
SELECT A SUITABLE SAVINGS PLAN
If you’re planning to start saving early for your child’s education, consider financial tools that aid in financing their future education. Tax-benefiting accounts like the 529 plans are worth exploring for their flexibility in covering education-related expenses. Another option could be the Coverdell Education Savings Accounts (ESA).
MAKE SAVINGS AUTOMATIC
Automating deposits into your college savings account can bolster your savings growth. Each monthly deposit boosts your total amount saved, and compound interest increases your savings further. Automated savings ensure regular contributions and deflect the allure of using the savings elsewhere.
INVOLVE FAMILY
Let grandparents and other family members know about your college savings objectives. They might be willing to support by contributing for birthdays, holidays, or other occasions.
INVEST SMARTLY
Create an investment strategy tailored to your risk level and timeline. Most college savings plans offer different investment options. Regularly review and adapt your investment approach as needed.
SEARCH FOR SCHOLARSHIPS AND FINANCIAL AID
Keep an eye out for possible scholarship or financial aid opportunities. Grants provide funds that don’t need to be repaid and can aid in lowering education expenses.
WHERE TO INVEST?
A 529 savings plan or a state-sponsored investment account can prove worthy when saving for educational expenses. Apart from covering college fees, 529 savings plans allow for tax-free withdrawal for K-12 tuition and other qualifying educational expenses.
You can also consider investing in Traditional and ROTH IRAs, tax-benefitting savings accounts where you can allocate investments into stocks, bonds, and mutual funds and adjust according to your needs and objectives.
Lastly, look into custodial accounts like UGMA and UTMA accounts that allow placing money or assets in a trust for a minor child or grandchild.
THE CONCLUSION
While the cost of college education is soaring at a dramatic speed, parents should start early with their savings to maximize the return on their investments.
Parents need to decide what fraction of their child’s college education they will cover and plan their monthly contributions accordingly. Choices for investment include 529 savings plans, brokerage accounts, or prepaid tuition plans, with 529 plans generally offering the most tax benefits and flexibility.
As each family’s financial situation varies, it’s crucial to personalize your college savings plan to suit your specific needs and circumstances. Review and revise your strategy regularly to adapt to changes in your family or financial circumstances.
