Raising children can be financially demanding. The Brookings Institution’s data indicates that the total cost of raising a child from birth to 17 years is over $300,000, excluding the significant cost of higher education. Hence, setting up a college fund for your children can be a strategic step in preparing them for successful adulthood. Wondering how to save? Here’s how.
THE COST OF ATTENDING COLLEGE
The U.S. News annual survey reports that the average tuition for the 2022-2023 academic year fluctuated between $39,723 (private colleges) and $10,423 (public, in-state colleges). Without any changes to education financing methods, the rising trend of college costs will continue. College costs generally grow at a rate double that of inflation annually. Hence, it is essential to consider what you might have to shell out for your young one’s (or descendant’s) college education down the line based on an estimated 6% college cost inflation rate.
HOW TO BEGIN SAVING FOR YOUR CHILD’S COLLEGE FUND
Building a college fund for your child is a wise investment that calls for thoughtful planning and commitment. Here are some effective steps to get started:
1. START EARLY: Initiating the savings process early on gives your money ample time to multiply. Ideally, you should start when your child is born. With the magic of compound interest and regular monthly or yearly deposits, your savings get an opportunity to increase over a longer span, alleviating the need to set aside significant amounts each month or year.
2. UNDERSTAND THE COSTS: Awareness of the various college expenses, expected and unexpected, allows you to compare schools and identify methods to minimize costs. This understanding provides a target saving amount.
3. SELECT THE RIGHT SAVINGS METHOD: If starting to save early is the plan, 529 plans or Coverdell Education Savings Accounts (ESA) can be worthwhile options, offering possible tax benefits and flexibility for education-related costs.
4. AUTOMATE SAVINGS: Arranging for automatic deposits into your college savings account helps grow your savings consistently. Setting up automatic savings not only encourages a regular contribution but also curbs the temptation to divert the money to other expenses.
5. ENCOURAGE FAMILY CONTRIBUTIONS: Communicate your college savings objectives to grandparents or other relatives. They might want to contribute for birthdays, holidays, or other occasions.
6. INVEST SMARTLY: Diversify your investment strategy based on risk tolerance and time frame. Escalate your investment strategy regularly and make adjustments when needed.
7. LOOK FOR SCHOLARSHIPS AND FINANCIAL AID: Be watchful for potential scholarships or grants. Although these do not substitute savings, they can help diminish some costs.
WHERE TO INVEST?
Investment for college generally involves opening a 529 savings plan or a state-sponsored investment account solely dedicated to educational purposes. 529 savings plans allow withdrawal of money for college and K-12 education and other qualified educational expenses without any income tax on the gain from the investment.
Traditional and Roth IRAs are also viable investment options. These tax-favored savings accounts hold investments like stocks, bonds, and mutual funds, which can be adjusted according to requirements and goals.
CUSTODIAL ACCOUNTS, known as Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts, permit putting money and or assets in trust for a minor child or grandchild until they reach the majority age, after which they get complete ownership.
THE FINAL WORD
As college costs keep increasing, it’s essential for parents to initiate savings early to gain maximum benefits from their investments. Identifying what percentage of college education costs they can pay will enable parents to structure monthly contributions accordingly. Though there are multiple investment options like a 529 savings plan, a brokerage account, or a prepaid tuition plan, a 529 savings plan likely offers more tax benefits and adaptability. However, every family’s financial position is unique, requiring bespoke plans for college fund savings. It is crucial to review and modify your strategy as your family expands and financial circumstances change.
