Parenting comes with a hefty price tag. The latest figures from The Brookings Institution suggest that the cost of raising a child, from birth until they are 17, is upwards of $300,000. And this doesn’t even account for the substantial cost of higher education. Setting up a college fund for your child is often a reliable way to usher them into a successful adulthood. But how do you go about saving for your child’s college fund?
THE EXPENSE OF HIGHER EDUCATION
A U.S. News annual survey finds that for the academic year of 2022-2023, fees average at $39,723 for private colleges and $10,423 for in-state public colleges. Unless there’s a shift in how people finance education, these costs are likely to escalate.
Higher education costs often inflate approximately twice the rate of general inflation yearly, a pattern that is projected to persist. Preparing for these increasing costs is essential and investing in a college fund can help:
STRATEGIES TO SAVE FOR YOUR CHILD’S COLLEGE FUND
Organizing a college fund for your children is a sound financial decision, which requires careful strategy and maintainence. Here are some practical steps:
START EARLY
Begin saving as soon as possible as it allows your money adequate time to accrue. The best time is often when your child is born. Utilizing compound interest and regular deposits over a prolonged period, you don’t need to set aside large sums to reach your target.
KNOW YOUR EXPENSES
The cost of college includes multiple elements and comprehending these costs will empower you to compare schools effectively and explore options to reduce your expenditure. This information will give you a clear savings goal.
SELECT THE RIGHT SAVINGS PLAN
For parents wanting to begin an early college fund, tax-advantaged accounts like 529 plans and Coverdell Education Savings Accounts (ESA) offer potential tax benefits and flexibility in covering education-related expenses.
INSTITUTE AUTOMATIC SAVINGS
Implementing automatic deposits into your college savings account allows your savings to accumulate. Adding to your savings each month, coupled with accruing compound interest, helps your money grow significantly. Automatic savings reduce the temptation to divert the money to other uses.
INVITE FAMILY CONTRIBUTIONS
Inform family members about your college savings target. They may wish to contribute on special occasions. For example, including a link to the child’s gift page in digital birthday party invitations gives them the option to contribute to the 529 savings account.
INVEST SMARTLY
You must consider a diverse investment strategy based on your risk tolerance and the investment timeline. Regularly revisit and adjust your investment strategy as needed.
KEEP AN EYE ON SCHOLARSHIPS AND AID
There are numerous scholarships and financial aid opportunities available. While they won’t replace your savings, they can certainly help soften some of the costs.
WHERE TO INVEST YOUR MONEY?
One option is opening a 529 savings plan, which is a state-sponsored investment account devoted to school investment. The money in 529 savings plans can be used for college and K-12 tuition and other qualified educational expenses, with investment gains not subject to income tax.
Traditional and ROTH IRAs are also an option, offering tax benefits for invested stocks, bonds, and mutual funds.
Custodial accounts like Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts allow you to create a trust for a minor child or grandchild. The trustee manages the account until the child reaches the age of majority (18 to 21 years, depending on your state).
THE BOTTOM LINE
The rapidly rising cost of college requires parents to start saving for it as early as possible. Once parents decide how much of their child’s college education they’re willing to finance, they can formulate a plan for their monthly contributions. Options include investing in a 529 savings plan, a brokerage account or a prepaid tuition plan, however, a 529 savings plan will probably offer the most tax benefits and flexibility.
It’s crucial to remember that every family’s financial situation is unique, so your college saving plan should be customized to your family’s unique needs and circumstances. As your family and financial situation progress, continue to revisit and adapt your strategy.
