Raising a child is costly. The Brookings Institution reports that on an average, bringing up a single child up to the age of 17 requires over $300,000, excluding the substantial cost of tertiary education. Setting aside money for your child’s college fund is typically a foolproof method to ensure they have a successful transition into adulthood. Wondering how you can prepare for your child’s future studies’ expenditure?
THE EXPENSE OF FURTHER STUDIES
As per an annual survey by U.S. News, for the academic year of 2022-2023, average tuition fees ranged from $39,723 (private colleges) to $10,423 (for public, in-state colleges), and these rates are anticipated to only rise further. Academic expenses increase approximately twice as much as inflation annually, a pattern likely to continue unabated in the foreseeable future. Here’s what you can potentially expect to shell out for each year of tuition, other fees, and accommodation when your child or grandchildren are ready for college (assuming a consistent 6% inflation in college costs):
When it comes to saving for college, consider these strategies:
GUIDELINES FOR SAVING FOR YOUR CHILD’S COLLEGE FUND
Setting aside funds for your children’s higher education is a strategic financial decision and requires meticulous planning and commitment. Here are some practical steps to follow:
START EARLY
The sooner you start saving, the more your money will compound. Ideally, you should start the college fund when your child is born. With regular monthly or annual contributions coupled with compound interest, the fund will gradually grow over a longer span, thus requiring smaller individual payments to reach your savings goal.
KNOW THE EXPENSES
College expenses encompass a number of costs which might catch you off guard. Being aware of these costs allows you to make informed decisions when comparing colleges and seeking ways to minimize expenses. This will help you envision a precise savings target.
SELECT THE RIGHT SAVINGS METHOD
If you plan on starting savings for your child’s future education in advance, certain savings methods can assist in investing funds effectively. Consider tax-favored accounts like 529 plans, which offer tax benefits and flexibility for educational expenses. Coverdell Education Savings Accounts (ESA) are another good option to look into.
AUTOMATE SAVINGS
Setting automatic deductions for your college savings account allows your savings to compound effortlessly. With each monthly instalment, your total savings increase, and compound interest boosts your savings even more. Setting up automatic deductions enables your account to grow maximally while assuring consistent contributions and preventing the impulse to divert the funds elsewhere.
REQUEST FAMILY CONTRIBUTIONS
Inform your extended family about your college savings goal. They might be interested in contributing during birthdays, holidays, or other events. During birthday parties, share the link to your child’s gift page in your digital invitations and mention that contributing towards the 529 savings account is an optional gift.
INVEST SENSIBLY
Adopt a diversified investment approach based on your risk tolerance and time horizon. Numerous college savings plans provide various investment options. Periodically reassess your investment strategy and adjust as needed.
SEARCH SCHOLARSHIPS AND FINANCIAL SUPPORT
Keep an eye out for potential scholarships or financial aid. Obtaining a college grant can save a lot of money. Although these won’t substitute your savings, they can certainly help manage some costs.
WHERE SHOULD YOU INVEST YOUR MONEY?
529 SAVINGS PLANS
For school investment, consider opening a 529 savings plan, which is a state-sponsored investment account exclusively used for academic purposes. With 529 savings plans, withdrawals for college and K-12 tuition and other qualified educational expenses are tax-free concerning any investment gains.
TRADITIONAL AND ROTH IRAS
Contemplate investing in a Traditional and ROTH IRA. IRA is a tax-favoured savings account where you can keep stocks, bonds, and mutual funds. You can adjust the investments as your objectives evolve.
CUSTODIAL ACCOUNTS
UGMA and UTMA accounts allow you to safely save money and assets for a minor child or grandchild. You oversee the account until the child reaches legal age (18 to 21 years, depending on the state). Then, they own the account and can use the funds freely.
IN SUMMARY
The cost of academic studies is increasing rapidly. However, it is advisable for parents to start saving as soon as possible to maximize their investments’ impact.
Once parents decide the proportion of their child’s academic expenses they’re willing to bear, they can establish a plan for their monthly contributions. They’ll have the option of investing in a 529 savings plan, a brokerage account, or a prepaid tuition plan, with the 529 savings plan likely providing the most tax benefits and flexibility.
Remember, every family’s financial situation is unique, which requires you to tailor your child’s college fund savings plan to your particular needs and conditions. Regularly review and adjust your strategy as your family expands and your financial circumstances advance.
