The cost of bringing up children is substantial. A recent study by The Brookings Institution shows that, on average, a child costs over $300,000 to raise from birth to age 17. This figure doesn’t even include the hefty cost of higher education. Setting up a college fund for your children is usually a reliable method for ensuring they transition into adulthood successfully. So, how do you save for your child’s college fund?
PRICE TAG OF COLLEGE EDUCATION
A recent survey by U.S News revealed that the average tuition fee for the 2022-2023 academic year varies between $39,723 (private colleges) and $10,423 (public, in-state colleges). If there are no significant changes in the way education is funded, these costs will only continue to scale upward.
College costs usually increase at roughly double the rate of inflation each year; a trend that doesn’t seem likely to change in the foreseeable future. Considering this, here’s what you could end up forking out for yearly tuition, fees, and room & board when your kids (or grandkids) are college-bound (based on a steady 6% college cost inflation rate):
There are several ways to save for college, let’s discuss some:
STRATEGIES TO BUILD A COLLEGE FUND FOR YOUR CHILD
Planning early and making smart decisions can make the financial task of saving for your child’s college fund easier. Here’s what you can do:
BEGIN EARLY
The sooner you start saving, the more time your money has to multiply. The birth of your child is a perfect time to start investing in a college fund. Regular contributions, coupled with compound interest, give your funds ample time to grow, reducing the amount you need to set aside each month or year to meet your savings target.
UNDERSTAND THE INVESTITURE
Knowing the total costs can help you compare institutions and find ways to reduce expenses. This will help you establish a savings goal.
PICK THE RIGHT SAVINGS PLATFORM
Considering tax-advantaged accounts like 529 plans, which offer potential tax savings and flexibility for education-related costs. Coverdell Education Savings Accounts (ESA) are another avenue to explore.
AUTOMATE CONTRIBUTIONS
By automating your deposits, you allow your savings to increase steadily. Regular savings can boost your total sum and generate more through compound interest. Start this process now to maximize potential growth and ensure consistent deposits. This will also help curb the temptation to spend the money elsewhere.
GET FAMILY INVOLVED
Inform relatives and close ones about your college savings goals; they might be eager to contribute during special occasions. For gift-giving occasions, provide a link to your child’s savings account as a potential gift option in your invitations.
PRUDENT INVESTMENTS
Determine an investment strategy tailored to your risk tolerance and timeframe. Many college savings plans offer a variety of options. Frequently review and adjust your plan as required.
UTILIZE SCHOLARSHIPS AND FINANCIAL AID
Monitor any scholarship or financial aid opportunities. These grants are essentially free money and while they can’t replace savings, they could help alleviate some costs.
WHERE TO INVEST YOUR CAPITAL?
529 SAVINGS PLANS
529 savings plans or state-sponsored investment accounts are designed specifically for higher education expenses. These plans are comprised of various funds, such as mutual funds, bond funds, and ETFs, providing tax benefits to contributors.
TRADITIONAL AND ROTH IRAS
These tax-advantaged savings accounts offer a variety of investment options, giving you the flexibility to adjust as your needs and goals evolve.
CUSTODIAL ACCOUNTS
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are trust accounts for minors that transfer to their control upon reaching legal age. The funds don’t have to be used solely for educational purposes.
IN CLOSING
Fast-growing college costs mean parents should start saving as early as possible to benefit them the most. After deciding how much of their child’s higher education they’re able to finance, parents can set a monthly contribution plan. Investing in a 529 savings plan often provides the most tax benefits and flexibility. However, it’s important to remember that every family’s financial situation is unique, so your savings plan should be tailored to fit your needs and adjusted as your circumstances change.
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