The cost of raising children is quite substantial, with the average price tag of bringing up a child from birth to age 17 pegged at a hefty $300,000, as reported by The Brookings Institution. This figure doesn’t even include the additional burden of tertiary education expenses. Establishing a college fund for your children is generally a reliable method to ensure they transition smoothly into successful adulthood. Wondering how to do this? Here’s how.
UNDERSTANDING COLLEGE EXPENSES
Based on the U.S. News yearly survey, the average tuition fees for the 2022-2023 academic year ranged from $39,723 for private colleges to $10,423 for public, in-state colleges. With the current trend of educational financing, expect these costs to continue climbing. College expenses typically rise at about twice the inflation rate annually, a trend predicted to persist in the foreseeable future. As your children or grandchildren prepare for college, assuming a constant 6% college cost inflation, here’s what each year may cost in terms of tuition, fees, and room and board:
STRATEGIES TO SAVE FOR COLLEGE
To build a sizable college fund for your kids, it necessitates thoughtful planning and commitment. Here are a few practical steps to assist you:
START SOONER THAN LATER
The sooner you begin saving, the better, as this gives your money ample time to multiply. Ideally, setting up a college fund at birth is suggested. With compounding interest and constant monthly or yearly investments, this strategy will allow your money to increase gradually over a lengthy period, reducing the amount you need to save per unit time.
COMPREHEND THE COSTS
College costs encompass a variety of expenses, some of which may be unexpected. Grasping these costs helps you compare institutions and seek ways to cut down expenses, giving you a more defined savings goal.
SELECT THE RIGHT SAVINGS TOOL
For early savings, several effective savings tools can help you save for your child’s future education. Consider tax-advantaged accounts such as 529 plans, which offer potential tax benefits and flexibility for educational expenditures. Another good option is the Coverdell Education Savings Accounts (ESA).
AUTOMATE SAVING
By automating your savings, the total sum saved increases with each monthly deposit, and further, compound interest offers additional benefits. This strategy encourages regular contributions and reduces the chance of spending the money elsewhere.
INVITE FAMILY PARTICIPATION
Alert relatives and other family members about your college savings goals. They might be willing to contribute on special occasions like birthdays and holidays. Make it easy for them to contribute by sharing the link to your child’s 529 savings account.
INVEST WISELY
Contemplate a diversified investment strategy based on your risk appetite and time horizon. Numerous college savings plans provide various investment options. Always revise and adjust your investment strategy when necessary.
BENEFIT FROM SCHOLARSHIPS AND FINANCIAL AID
Keep tabs on scholarships and financial aid opportunities; they’re essentially free money. Although these do not replace savings, they can help to alleviate some costs.
CHOOSING WHERE TO INVEST
When planning for college, consider opening a 529 savings plan or a state-sponsored investment account exclusively used for education purposes. With these plans, you are exempt from income tax on the earnings from your investments used for tuition and other eligible educational expenses.
You can also consider traditional and ROTH IRAs, tax-advantaged savings accounts where you decide how your funds are invested.
Custodial accounts under the Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are trust funds for minors who can use these funds as they wish after attaining age majority.
FINAL THOUGHTS
Even though college costs are burgeoning fast, early and consistent saving can provide a good return on investment. Once you choose what portion of the college expenses you’re willing to incur, you can plan your monthly contributions. You can invest in a 529 savings plan, a brokerage account, or a prepaid tuition plan, although a 529 savings plan is likely to offer the most tax breaks and flexibility.
Remember, every family has unique financial circumstances, so it’s crucial to tailor your college fund plan to suit your specific needs and conditions, and continually review and modify your approach as your financial situation and family evolve.
