Kids are a financial investment. Statistics from The Brookings Institution state that the average cost of raising a child from birth through age 17 is more than $300,000. And that price tag doesn’t include the substantial cost of further education. Establishing a college fund for your child is one common measure taken by parents to secure their child’s prosperous future. Want to know how to save for your child’s education? Let’s dig in.
THE FUTURE OF COLLEGE EXPENSES
The average tuition for the 2022-2023 academic year, as reported in U.S. News’ annual survey, is between $10,423 for public, in-state colleges and $39,723 for private institutions. Based on current trends, these costs are expected to steadily escalate. College costs typically increase at around twice the rate of annual inflation, a trend predicted to persist. Here are some projected figures for tuition, fees, room and board costs for when the younger generations are college-bound, assuming a consistent 6% rise in college costs:
HOW TO START SAVING FOR COLLEGE
Creating a college fund for your child is a prudent financial move that involves strategic planning and commitment. Here are some helpful steps:
START EARLY
The sooner you start saving, the more chance your money has to multiply. Ideally, it’s best to begin a college fund when your child is born. With the power of compound interest and steady deposits made monthly or annually, the funds have more time to accumulate, reducing the amount you’ll have to save each month or year to reach your target amount.
COMPREHEND THE COSTS
College costs can entail a range of factors, some of which may surprise you. Understanding these costs can help you make comparisons between schools and identify ways to reduce expenses, providing you a clear savings target.
SELECT THE RIGHT SAVINGS PLAN
If you’re looking to begin saving for your child’s future education, consider investing in tax-advantaged accounts like 529 plans, which offer potential tax benefits and versatility for educational expenses. Coverdell Education Savings Accounts (ESA) are another worthwhile consideration.
AUTOMATE YOUR SAVINGS
By setting up automatic transfers into your college savings account, you’re helping your savings grow. Each monthly deposit contributes to your total savings, with compound interest offering even further growth. Setting up automated savings now gives your account more growth potential and helps avoid the temptation to divert funds elsewhere.
ENCOURAGE FAMILY CONTRIBUTIONS
Let grandparents and other relatives know about your college savings plan. They might be open to contributing on special occasions. For birthdays, include a link to your child’s gift page in your digital invite and mention that contributing to the 529 savings account is a thoughtful alternative to traditional presents.
SMART INVESTMENTS
Consider adopting a diversified investment approach based on your risk tolerance and available time before college enrollment. There are numerous investment options available through many college savings plans. Ensure to routinely evaluate and tweak your investment strategy as necessary.
EXPLORE SCHOLARSHIPS AND FINANCIAL AID
Keep an eye out for potential scholarships or financial aid packages. Securing a college grant equates to free financing which can help ease some overall costs.
WHERE TO INVEST YOUR MONEY?
529 SAVINGS PLANS
If you’re saving for college, consider opening a 529 savings plan, a state-sponsored investment account dedicated to education funding. With 529 plans, your withdrawals for college and K-12 tuition, and other eligible educational expenses, are exempt from income tax on any investment profits.
529 plans incorporate a variety of funds like mutual funds, bonds funds, and ETFs. Its tax benefits make it the preferred choice for college savings: Contribute up to $15,000 yearly, tax-free, and watch your earnings grow tax-free.
TRADITIONAL AND ROTH IRAS
Consider also investing in Traditional and Roth IRAs. An IRA is a tax-friendly savings account which houses investments such as stocks, bonds, and mutual funds. You manage the account’s investments, adjusting them as your needs and objectives evolve.
CUSTODIAL ACCOUNTS
Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts are trust accounts for minors. As a trustee, you manage the account until the child comes of age (between 18 and 21, depending on your state). When this point is reached, the funds become the child’s property for any use; educational or otherwise.
THE BOTTOM LINE
Though college costs are on the incline, starting your savings early enables you to garner more returns on your investments. Once you’ve decided on the portion of your child’s college education you plan to finance, you can plan your monthly contributions accordingly.
You have options between a 529 savings plan, a brokerage account, or a prepaid tuition plan, the 529 plan typically offers the most tax benefits and flexibilities. Remember each family’s financial circumstances are unique, and your college savings plan should be customized to your family’s needs. Review and adjust your strategy regularly as your family and financial situation changes.
