Raising children is a costly affair. The Brookings Institution’s latest data reveals that the cost of raising a child from birth to 17 years of age exceeds $300,000 on average, and this figure does not even include the substantial cost of higher education. Establishing a college fund for your kids is a reliable strategy to support their successful transition into adulthood. Want to learn how to save for your child’s higher education?
UNDERSTANDING THE COST OF COLLEGE
The annual U.S. News survey indicates that the estimated tuition for the 2022-2023 academic year ranges from $39,723 for private colleges to $10,423 for public, in-state colleges. Unless there is a shift in the way education is financed, these costs will continue to rise. University expenses generally increase at approximately double the rate of inflation each year. Assuming a steady 6% college cost inflation rate, here’s what you can anticipate to spend on tuition, fees, and room and board annually when your child is ready for college:
To help saving for college, consider these strategies:
STRATEGIES FOR SAVING FOR YOUR CHILD’S COLLEGE FUND
The financial commitment to saving for your children’s college funds necessitates meticulous planning and commitment. Here are some practical measures you can take:
START EARLY
The sooner you begin saving, the more time your money will have to accumulate. Ideally, establishing a college fund when your child is born allows for the best growth potential. With compound interest and regular investments, the funds have an extended growth period, minimizing the amount you need to set aside monthly or yearly to achieve your savings goal.
UNDERSTAND THE COSTS
A variety of factors contribute to the total cost of college, some of which might be surprising. Understanding these costs enables you to compare different colleges and explore avenues to reduce these expenses, helping clarify your savings target.
CHOOSE THE RIGHT SAVINGS PLATFORM
Selecting the appropriate savings platform for your child’s future education is crucial. Look into 529 plans, tax-advantaged accounts that offer potential tax benefits and flexibility for educational costs. Another option is the Coverdell Education Savings Accounts (ESA).
AUTOMATE SAVINGS
Automating your college fund contributions can help grow your savings over time. Each monthly deposit takes you closer to your savings goal, and compound interest bolsters your savings further. Automation ensures regular deposits and reduces the temptation to spend.
INVITE FAMILY CONTRIBUTIONS
Let family members in on your college savings goals, as they might be willing to chip in for birthdays, holidays, or other special occasions. Making it an option to contribute to educational savings as a gift is a great idea.
INVEST SMARTLY
Adopt a diversified investment strategy suited to your risk tolerance and long-term goals. Regularly monitor and adjust your strategy as necessary.
LOOK OUT FOR SCHOLARSHIPS AND FINANCIAL AID
Keep an eye out for scholarship or financial aid opportunities, as these provide free money that can help offset college costs.
WHERE TO INVEST?
Consider opening a 529 savings plan or a state-sponsored investment account designed specifically for education costs. These provide a tax-free way to save and pay for qualifying educational expenses. They include a variety of funds, such as mutual funds, bond funds, and ETFs, and are often recommended due to the tax benefits attached.
Traditional and Roth IRAs, along with Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts, are other options to consider. However, the latter gives the child complete access to the account once they reach the age of majority.
IN CONCLUSION
With college costs on the rise, it’s essential for parents to begin saving as soon as possible to maximize investment returns. Deciding the percentage of the child’s higher education they wish to finance allows parents to designate their monthly contributions and select the most suitable investment vehicle for their needs – with 529 plans offering the most tax benefits and flexibility.
It’s crucial to remember that each family’s financial situation is different, and therefore a college savings strategy should be tailored to fit individual needs and circumstances. Regularly review and alter your savings plan as your family and financial situation evolve.
