Parenting is not a cheap affair. As per the latest findings from The Brookings Institution, average costs for raising a child from birth to the age of 17 can exceed $300,000. This estimate doesn’t even include the often heavy financial burden of higher education. Hence, setting up a college savings fund for your children can be a beneficial way of helping them step into a successful adulthood. Wondering how to go about saving for your child’s college education?
THE REAL COST OF COLLEGE EDUCATION
A yearly survey by U.S. News reveals that expected tuition for the 2022-2023 academic year ranged from $39,723 (private colleges) to $10,423 (public, in-state colleges). Since significant changes in education payment methods seem unlikely, the costs of college are on a consistent rising curve.
Year on year, college costs typically inflate about twice as rapidly as general inflation, and this trend looks to continue for quite a while. You may have to entertain the thought of steep increases in tuition, fees and living costs by the time your children or grandchildren are ready for college (estimating at a steady college cost inflation of 6%).
PLANNING FOR YOUR CHILD’S COLLEGE FUND
Planning for your children’s college funds is a prudent financial resolution that needs meticulous planning and commitment. Here are a few effective steps to consider:
START EARLY
Early savings bring greater growth over time. Starting a college fund at your child’s birth is an ideal option. This allows for a longer period of compounding interest and deposits made on a regular monthly or yearly basis. Consequently, you won’t have to save as much monthly or annually to meet your goal.
UNDERSTAND THE COSTS
Knowing the true nature of college expenses can be quite helpful. You would be surprised to find costs that you may never have thought of before. Insightful understanding of these expenditures can help you appropriately set a target savings amount and explore different schools and cost-reducing opportunities.
CHOOSE THE RIGHT SAVINGS VEHICLE
Starting savings for your child’s college fund early will pay off with the right savings plan. Tax-advantaged accounts such as 529 Plans can give you tax benefits along with flexible terms for educational-related expenses. Coverdell Education Savings Accounts (ESA) are also worth exploring for their potential benefits.
AUTOMATE YOUR SAVINGS
Automatic contributions to your college savings account can have a positive momentum on growth. Every month’s deposit adds up to your total savings, significantly increased by compounding interest over time. Automated savings encourage consistent contributions and help avoid the temptation of spending the money elsewhere.
ENCOURAGE FAMILY CONTRIBUTIONS
Get family members involved, like grandparents, in your college savings goals. Contributions for birthdays, holidays, or special occasions could come in handy in increasing the fund.
INVEST WISELY
Develop a diversified investment strategy reflective of your risk tolerance and time horizon. Regularly evaluate and modify your investment plans accordingly.
LOOK FOR SCHOLARSHIPS AND FINANCIAL AID
Keep an eye out for scholarships or financial aid that can help reduce some of the costs. Grants can provide a welcome relief to your savings.
WHERE TO PUT YOUR MONEY?
529 SAVINGS PLANS
If you’re saving for college, have a look at 529 savings plans. These start-sponsored investment accounts are specifically designed for school-related expenses. They offer significant tax advantages, with the money withdrawn used for qualified educational expenses not liable for income tax on any investment gains.
TRADITIONAL AND ROTH IRAS
Traditional and Roth IRAs are tax-advantaged savings accounts worth considering. They allow you to hold investments like stocks, bonds, and mutual funds with the flexibility to modify the investments based on your changing needs and goals
CUSTODIAL ACCOUNTS
UGMA and UTMA accounts allow you to set up a trust for your minor child or grandchild. These accounts hold both money and/or assets which are managed by you as a trustee till the time the child reaches the age of majority. Then, the child gets full ownership of the account to use the funds as they see fit.
FINAL WORDS
College costs are escalating at a rapid pace, but starting savings early can optimize the returns on your investments. After understanding the share of your child’s college education you’re willing to cover, you can lay out a plan for your monthly contributions.
Having the option to invest in a 529 savings plan, a brokerage account or a prepaid tuition plan, it’s most likely you’ll reap the greatest tax benefits and flexibility from a 529 savings plan.
It’s essential to remember that each family has a unique financial situation, so tailor your college savings plan according to your specific needs and circumstances. Revise your strategy as your family and financial circumstances change.
