Having children can be costly, with estimated average costs ranging over $300,000 until they turn 17, according to recent data from The Brookings Institution. These figures don’t even consider the significant cost of higher education. Therefore, establishing a college fund for your children is a crucial step towards setting them up for a successful future. Curious about how to go about it?
COLLEGE TUITION COSTS
U.S. News’s yearly survey revealed that the average tuition for the academic year 2022-2023 varied from $39,723 (private colleges) to $10,423 (public, in-state colleges). Unless significant changes are made in education funding, these costs are likely to keep soaring. The cost of college is typically rising about twice as fast as inflation each year – a trend anticipated to continue into the future. Considering an estimated steady 6% college cost inflation rate, this gives you a rough idea of what college tuition, fees, and room and board might cost by the time your children or grandchildren are college-ready.
STRATEGIES FOR SAVING FOR HIGHER EDUCATION
Saving towards your kids’ college education is a savvy financial move, needing detailed planning and commitment. Here are some feasible steps to aid you:
START AS EARLY AS POSSIBLE
The sooner you begin saving, the more time your money has to accumulate. Ideally, kick off a college fund once your child is born. With compound interest and consistent contributions either monthly or yearly, the funds can grow over an extended period, making it unnecessary to save large amounts every month or year.
GET A GRIP ON THE COSTS
College expenses encompass various elements, including some unexpected ones. Understanding these costs can help you compare schools and discover ways to minimize your expenses.
FIND THE RIGHT SAVINGS TOOL
To save early for your child’s college, consider using tools that allow you to invest in their future education. Tax-advantaged accounts like 529 plans, which offer potential tax benefits and flexibility for education-related expenses, or Coverdell Education Savings Accounts (ESA) are among these tools.
AUTO-SAVE
Arranging automatic deposits into your college savings account allows your savings to grow steadily. The monthly deposits, along with the compound interest, will boost your savings. This process ensures steady contributions and reduces the risk of spending the money elsewhere.
INVITE FAMILY CONTRIBUTIONS
Share your college-saving goals with grandparents and other relatives, who might be willing to chip in during birthdays, holidays, or special occasions. Consider including the link to your child’s gift page in your digital party invitations.
INVEST PRUDENTLY
A diversified investment strategy based on your risk tolerance and investment timeline is crucial. Regularly review and adjust your strategy as required.
LOOK OUT FOR SCHOLARSHIPS AND FINANCIAL AID
Keep an eye out for scholarships or financial aid as these are essentially free money, and could help reduce some costs.
WHERE TO INVEST?
Consider using 529 SAVINGS PLANS or designated state-sponsored investment accounts. These plans allow you to use your withdrawn funds for college and K-12 tuition and other qualified educational expenses without incurring income tax on your investment earnings.
TRADITIONAL AND ROTH IRAs
Traditional and ROTH IRAs can also be good investment choices. These are tax-favored saving accounts wherein you can hold investments such as stocks, bonds, and mutual funds and change them as your needs and goals evolve.
CUSTODIAL ACCOUNTS
Custodial accounts such as UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) allow you to save money or assets for a minor who can access and use the funds for any purpose once they reach the age of majority.
IN A NUTSHELL
College expenses are escalating quickly. However, by starting saving plans early, parents can increase profits from their investments. After establishing the portion of their child’s higher education they’re ready to finance, parents can design a monthly contribution strategy. They can invest in a 529 savings plan, a brokerage account, or a prepaid tuition plan, with the best tax benefits and flexibility likely coming from 529 savings plans. Remember, each family’s financial situation is unique, so tailor your savings strategy to your specific needs and circumstances, and make regular reviews and adjustments as your family and financial situation evolves.
