Raising a child is expensive, costing over $300,000 on average from birth until they turn 17, according to recent data from The Brookings Institution. And this doesn’t even include the cost of college. Setting up a college fund can be a great way to support your child’s future financial stability. Want to know how to start saving for your child’s college education? Let’s get started.
UNDERSTANDING COLLEGE COSTS
Based on an annual survey by U.S. News, the average tuition for the 2022-2023 school year ranged from $10,423 for in-state public colleges to $39,723 for private colleges. These costs are expected to keep rising, usually at about twice the rate of regular inflation every year. To be prepared, you should estimate the future costs of tuition, fees, room, and board for when your child is ready for college, assuming a constant 6% annual increase.
PLANNING YOUR CHILD’S COLLEGE FUND
Creating a college fund requires careful planning and dedication. Here are some practical steps to help you:
START SAVING EARLY
The earlier you begin saving, the more time your money has to grow. Ideally, set up a college fund as soon as your child is born. With compound interest and regular contributions, the funds can build up over time, meaning you’ll need to save less each month to meet your goals.
UNDERSTAND THE EXPENSES
Knowing the full scope of college costs, including any unexpected ones, helps you compare schools and identify ways to reduce expenses. This can help you set a realistic savings target.
CHOOSE THE RIGHT SAVINGS TOOLS
To start early, consider using tools like 529 plans and Coverdell Education Savings Accounts (ESA), which offer tax benefits and flexibility for education-related expenses.
ENABLE AUTOMATIC SAVINGS
Set up automatic deposits into your college savings account to consistently build your savings and benefit from compound interest. This also helps to avoid the temptation to use the funds for other purposes.
INVITE FAMILY SUPPORT
Let grandparents and other relatives know about your college savings goals. They might be willing to contribute during special occasions. For birthdays, you can share a link to your child’s online donation page in the e-invitation, suggesting a contribution to the 529 savings account as a gift option.
INVEST WISELY
Develop a diversified investment strategy based on your risk tolerance and timeline. Regularly review and adjust your investments as needed.
RESEARCH SCHOLARSHIPS AND FINANCIAL AID
Look for potential scholarships or grants as these can help reduce the overall costs. While they can’t replace savings, they do provide additional financial support.
CHOOSING AN INVESTMENT ACCOUNT
529 SAVINGS PLANS
A 529 savings plan is a state-sponsored investment account designed for education-related expenses and is highly recommended for college savings. Withdrawals for college and K-12 tuition, as well as other educational expenses, are tax-free.
TRADITIONAL AND ROTH IRAS
Consider Traditional and Roth IRAs, which are tax-friendly savings accounts that allow you to invest in stocks and mutual funds.
CUSTODIAL ACCOUNTS
UGMA and UTMA accounts let you set up a trust for a minor child. You manage the account until they reach adulthood, allowing them to use the money as they wish.
IN CONCLUSION
College costs are increasing, but starting to save early can help maximize your investment returns. Once you decide how much of your child’s education you want to cover, create a plan for your monthly contributions. Options like 529 savings plans, brokerage accounts, or prepaid tuition plans are available, with 529 savings plans often offering the most tax benefits and flexibility. Remember, each family’s financial situation is unique, so customize your savings plan accordingly. Regularly review and update your strategy as your family’s needs and financial circumstances change.