Raising children isn’t cheap. The latest data from The Brookings Institution calculates the estimated cost of rearing a child from birth to the age of 17 to be over $300,000. This figure doesn’t even include the significant expense of higher education. Setting up a college fund for your kids is typically a certain way to facilitate their transition to a successful adult life. Curious about how to go about this?
A LOOK AT COLLEGE EXPENSES
According to a survey conducted by U.S. News, projected tuition fees for the 2022-2023 academic year vary from $39,723 (private colleges) to $10,423 (public, in-state colleges). Given the current trend, college expenses are likely to continue rising unless there’s a change in how education is financed. College expenses tend to increase at nearly double of the inflation rate every year, a trend anticipated to carry on for the foreseeable future. Here are the estimated yearly costs, considering tuition, fees, and living costs, assuming a stable annual college cost inflation rate of 6%:
FOR A COLLEGE SAVINGS: TIPS AND STRATEGIES
Saving for your children’s college funds is a smart financial choice which requires strategic planning and commitment. Here are a few recommended steps:
BEGIN AS EARLY AS POSSIBLE
The sooner you start saving, the more time your money has to accumulate. The ideal time to create a college fund is at the birth of your child. By investing regularly every month or year, the power of compound interest can significantly grow your savings over time. This also means you can contribute less each month or year to attain your savings goal.
GRASP THE EXPENSES
Understanding the full range of college costs helps you plan better, since it often includes expenses you may not have anticipated. By understanding the expenses involved, you can assess different educational institutions and devise ways to trim the costs. This information can also help determine your target savings.
PICK THE RIGHT SAVINGS MECHANISM
To begin saving for your child’s future education, consider savings mechanisms like 529 plans which offer potential tax benefits and flexibility for education-related costs. Coverdell Education Savings Accounts (ESA) are another valuable option worth exploring.
AUTOMATE YOUR SAVINGS
Automatic transfers to your college savings account can enhance your savings. Each deposit helps grow the fund, with compound interest augmenting the savings even more. Setting up automated savings helps your account grow faster and also reduces the temptation to spend those funds elsewhere.
CALL FOR FAMILY CONTRIBUTIONS
Inform your family members about your college savings plan. They may choose to contribute during birthdays, holidays, or other special events. For birthdays, include a link to your child’s 529 savings account in the e-invitation and add a note explaining how contributions can act as gifts.
INVEST PRUDENTLY
Adopt a diversified investment strategy depending on your risk tolerance and investment timeline. College savings schemes often provide different investment choices. Evaluate and adjust your investment strategy regularly as needed.
LOOK FOR SCHOLARSHIPS AND FINANCIAL AID
Keep an eye on available scholarships or other financial aid opportunities. Scholarships are essentially free money that can be used to defray some of the costs.
INVESTMENT OPTIONS
529 SAVINGS PLANS
A 529 savings plan or state-sponsored investment account is a reliable option if you’re saving for higher education. The funds withdrawn for college and K-12 tuition and other fixed educational expenses are tax-free, including investment gains.
TRADITIONAL AND ROTH IRAS
Another option is investing in Traditional and Roth IRAs, which are tax-advantaged accounts where you can invest in stocks, bonds, and mutual funds.
CUSTODIAL ACCOUNTS
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts allow you to put money into a trust for a minor, over which you’ll have control until the child reaches legal age.
CONCLUSION
The cost of education is surging, but early savings can yield significant results. Once you settle on what percentage of your child’s college expenses you’re prepared to shoulder, you can devise a plan for your monthly contributions.
Remember, every family’s financial situation is unique. It’s vital to design your college savings plan according to your financial circumstances and family needs. Periodically check and adjust your plan as your financial situation and family evolve.
