Parenting is costly, with costs averaging over $300,000 per child from birth to age 17, as per The Brookings Institution’s most recent findings. And that’s not even considering the enormous financial burden of tertiary education. A college fund is widely viewed as a reliable method to ease your children into a successful adult life. Curious about how to grow a college fund for your child?
COST OF COLLEGE
As per the annual survey by U.S. News, the average tuition for the 2022-2023 academic year spanned from $39,723 (at private colleges) to $10,423 (at public, in-state colleges). Unless there’s a revolutionary shift in how education is financed, these figures are bound to rise.
College costs generally inflate at twice the rate of normal inflation each year, a truism likely to hold for the foreseeable future. Considering a steady 6% college cost inflation rate, here’s what you may spend yearly on tuition, fees, and accommodation once your child (or grandchild) is college-ready:
If you’re curious about college savings strategies, here are some possibilities:
HOW TO GROW YOUR CHILD’S COLLEGE FUND
Saving for your child’s college fund is a smart financial move demanding diligence and thorough planning. Here are some strategies to use:
BEGIN ASAP
The sooner you start saving, the longer your money has to accrue value. Ideally, start a college fund when your child is born. With compound interest and consistent investments you don’t need to save as much each month or year to meet your savings goal.
COMPREHEND THE COSTS
Understanding all the different costs of college will help you compare schools and seek ways to reduce your expenses, giving you a specific savings target.
PICK THE SUITABLE SAVINGS METHOD
To start early saving for your child’s college education, consider tax-advantaged accounts like 529 plans, which provide potential tax benefits and flexibility for educational expenses. Coverdell Education Savings Accounts (ESA) are another option worth considering.
AUTOMATE SAVINGS
By creating automatic deposits into your college savings account, your savings can grow significantly. Each monthly deposit increases your total savings, with compound interest generating additional gains. Automatic saving ensures consistent contributions while reducing chance of spending the money elsewhere.
FAMILY CONTRIBUTIONS
Let relatives know about your college savings goals. They might be willing to chip in on special occasions. For birthdays, you could suggest that a contribution to the 529 account could be a suitable gift.
INVEST WISELY
Implement a diversified investment strategy suitable to your risk tolerance and investment timeline. Numerous college savings plans propose different investment opportunities. Regularly review and adjust your investment strategy accordingly.
SCHOLARSHIPS AND FINANCIAL AID
Keep an eye out for scholarships or financial aid chances. College grants translate into free money. While they can’t replace your savings, they can help lower costs.
WHERE SHOULD YOU INVEST?
Consider opening a 529 savings plan or a state-backed investment account committed for educational investment. The money withdrawn from 529 plans for college and K-12 tuition and other accredited educational expenses is tax-free.
529 plans house various funds such as mutual funds, bond funds, and ETFs. They’re typically chosen for their educational tax benefits: Single tax-filers can contribute up to $15,000 tax-free and earnings grow tax-free.
Traditional and Roth IRAs are other investment considerations. An IRA is a tax-sheltered savings account where you store investments like stocks, bonds, and mutual funds, and adjust as your needs and goals evolve.
CUSTODIAL ACCOUNTS
Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts that allow you to set aside money or assets for a minor child or grandchild. As the trustee, you manage the account until the child reaches adulthood. From then on, they can use the money however they wish.
BOTTOM LINE
Despite the rapid rise in college costs, it’s prudent for parents to start saving early to maximize their investment returns.
Once parents decide how much of their child’s college education they’re willing to cover, they can plan their monthly contributions. Options for investment include a 529 savings plan, a brokerage account, or a prepaid tuition plan, with the 529 plan typically offering the most tax benefits and flexibility.
Remember, each family’s financial circumstances are unique. It’s crucial to personalize your college fund plan to align with your specific needs and circumstances, and regularly review and adjust your strategy as your family and financial situation change.
