The cost of bringing up children is significant. Statistics from The Brookings Institution show that from birth to 17 years, a child costs an average of over $300,000. This doesn’t even take into account the considerable cost of higher education. Setting up a college fund for your child is a reliable way to support them into a successful adulthood. Curious about how to create a college fund for your child?
UNDERSTANDING THE FINANCIAL DEMANDS OF HIGHER EDUCATION
A yearly survey by U.S. News reveals that the average tuition fee for the 2022-2023 academic year fluctuates between $39,723 (for private institutions) and $10,423 (for public in-state colleges). If the current payment trends persist, the cost of college education will continue to escalate.
The cost of college encounters an average increase of double the rate of inflation annually, a trend anticipated to continue. Therefore, by the time your child is ready for college, you can expect a significant rise in the cost of tuition, fees, and accommodation.
HOW TO SET-UP A COLLEGE FUND FOR YOUR CHILD
Creating a college fund is a judicious financial step that involves thoughtful planning and commitment. Here are some useful tips to assist you:
START SAVING SOONER
The sooner you start saving, the more time your money has to mature. Ideally, the process should start when your child is still an infant. With the advantage of compound interest and regular investments, the savings will have a chance to flourish over a lengthy period, reducing the amount you need to set aside monthly or annually to meet your savings goal.
KNOW THE EXPENSES
College fees encompass a range of items, some of which may surprise you. Getting acquainted with these costs helps you weigh your options, lower your expenses, and set a savings target.
PICK THE RIGHT SAVINGS TOOL
To kick-start your child’s college fund, consider tax-advantaged accounts like 529 plans. These plans offer potential tax benefits and flexibility for education-related expenses. Alternatively, you can explore Coverdell Education Savings Account (ESA).
ESTABLISH AUTOMATIC SAVINGS
Setting up automatic transfers to your college savings account ensures that your savings steadily accumulate. Each deposit ramps up your total savings, further boosted by compound interest. This system safeguards consistency in contributions and mitigates the temptation to divert funds.
GET FAMILY INVOLVED
Inform your relatives about your college savings plan. They might be willing to chip in during holidays, birthdays, or other special events. Consider sharing a link to your child’s gift page with a brief note explaining that they can contribute to the 529 savings account as a gift option.
INVEST SMART
Incorporate a balanced investment strategy based on your risk tolerance and timeframe. Regularly revisit and adjust your strategy as needed.
LOOK OUT FOR SCHOLARSHIPS AND FINANCIAL AID
Explore available scholarships and financial aid potentially available. Although these won’t replace your savings, they can help to reduce some costs.
WHERE TO INVEST YOUR SAVINGS?
529 SAVINGS PLANS
If you’re saving for college, consider a 529 savings plan or a state-sponsored investment account. These plans allow tax-free withdrawal for college and K-12 tuition and other qualified education costs, providing tax-free investment gains.
TRADITIONAL AND ROTH IRAs
Consider investing in Traditional and ROTH IRAs. IRAs are tax-favored savings accounts that hold investments such as stocks, bonds, and mutual funds, and allow you to manage and adjust the investments based on your needs and objectives.
CUSTODIAL ACCOUNTS
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts that permit you to set aside money and/or assets for a minor. Once the child reaches 18 to 21 years of age, they own the account outright and can use the funds as they wish, including for non-educational expenses.
IN CONCLUSION
Despite the soaring cost of college, it’s advisable for parents to start saving early to yield greater benefits from their investments. After deciding the percentage of college fees they intend to cover, parents can plan their monthly contributions accordingly.
Options include investing in a 529 savings plan, a brokerage account, or a prepaid tuition plan, with potentially the greatest tax benefits and flexibility coming from a 529 savings plan. Always keep in mind that every family’s financial situation is unique; therefore, your college savings strategy should be tailored to fit your circumstances and needs, being ready to adjust as necessary.
