Raising children can come with a hefty price tag. The Brookings Institution reveals that, on average, the costs of raising one child, from their birth to their 17th birthday, typically exceed $300,000. And this figure doesn’t even factor in the sizable costs of further education. Establishing a college fund for your kids often serves as the key stepping stone to their successful future. Wondering how to fund your child’s further education?
THE REAL-TIME COSTS OF COLLEGE
A yearly survey by U.S. News shows that the average tuition fees for the 2022-2023 school year oscillated between $39,723 (for private colleges) and $10,423 (for public, in-state colleges). Unless there’s a significant shift in the way education is funded, these costs will likely continue to surge.
Education costs are seen to rise roughly two times the rate of yearly inflation and this trend is predicted to persist into the future. Here’s an estimate of what you may need to shell out for every year of college tuition, fees, room and board, assuming a constant college cost inflation rate of 6%.
If you’re looking for methods to save for college, here are some possibilities:
HOW TO SAVE FOR YOUR CHILD’S COLLEGE EDUCATION
Putting away money for your child’s future college pursuits is a smart money move that calls for thoughtful planning and consistency. Here are some practical steps you can follow:
START AS SOON AS POSSIBLE
The sooner you start saving, the more time you give your money to compound. The best time to kick-start a college fund is ideally when your child is born. By investing routinely, either monthly or yearly, you allow the fund to compound over a more extended period. Consequently, you won’t have to set aside a substantial amount every month or year to reach your savings target.
GRASP THE EXPENSES
College costs can come in various forms, including unexpected ones. Understanding these costs can help you evaluate schools and explore ways to trim down your expenses. This insight can be useful in determining your savings goal.
PICK THE RIGHT SAVINGS METHOD
If you wish to begin saving for your child’s college education early, there are several savings schemes designed to aid your journey. You could consider exploring tax-friendly accounts like 529 plans, which provide tax advantages and adaptability for educational expenses. Coverdell Education Savings Accounts (ESA) are another option worth considering.
AUTOMATE YOUR SAVINGS
By automating your savings, you offer an opportunity for your savings to multiply. Every monthly deposit contributes towards your savings, and compound interest bolsters this growth. By establishing an automated savings plan, you maintain steady contributions and prevent an unnecessary diversion of your savings.
KEEP FAMILY IN THE KNOW
Keep grandparents and other family members in the loop about your savings plans for college. They might be open to contributing during birthdays or special occasions.
INVEST PRUDENTLY
Implement a diversified investment strategy that aligns with your risk tolerance and time boundaries. Most college savings plans offer various investment options. Keep an eye on your investments and make adjustments as required.
LOOK FOR SCHOLARSHIPS AND FINANCIAL AID
Don’t forget the value of scholarships or financial aid. Free money is always welcome, and it can offset some of your costs.
WHERE SHOULD YOU INVEST?
529 SAVINGS PLANS
If you’re investing with a college fund in mind, consider opening a 529 savings plan. Individuals can withdraw from 529 savings plans for college-related expenses without paying income tax on any gains accrued. These plans consist of a variety of different funds such as mutual funds, bonds funds, and ETFs and offer significant tax benefits like tax-free contributions and earnings.
TRADITIONAL AND ROTH IRAS
Traditional and ROTH IRAs are tax-advantaged savings accounts worth considering. As the name suggests, you can hold investments like stocks, bonds, and mutual funds.
CUSTODIAL ACCOUNTS
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts that let you stash away money or assets for a child until they turn 18-21.
CONCLUSION
Given the rapid hike in college costs, it is advisable for parents to commence saving early. Set a realistic contribution plan depending on what proportion of your child’s education you can fund. You can choose from the 529 savings plan, a brokerage account or a prepaid tuition plan, but the 529 plan typically offers the most in terms of tax benefits.
Every family’s financial circumstances are unique, so ensure your savings plan caters to your specific needs and financial situation. Remember to reevaluate and update your savings strategy as per your financial situation and family dynamics.
