Raising children can be expensive. According to The Brookings Institution, it costs over $300,000 to raise a child from birth until they turn 17. And that doesn’t even include the cost of college. One effective way to help your kids become successful adults is to set up a college fund. Not sure how to save for your child’s college education? Let’s break it down.
### THE COST OF COLLEGE EDUCATION
According to the U.S. News annual survey, the average tuition for the 2022-2023 academic year ranged from $39,723 for private colleges to $10,423 for public in-state colleges. And unless the education funding system changes, these costs will likely keep going up.
College costs are increasing at about twice the rate of inflation every year. This trend is expected to continue. To give you an idea of future costs, assume a steady 6% rise in college expenses each year covering tuition, fees, room, and board.
### HOW TO FUND YOUR CHILD’S COLLEGE EDUCATION
Saving for college is a smart financial move, but it requires careful planning and dedication. Here are some steps to guide you:
#### START EARLY
The earlier you start saving, the more time your money has to grow. Ideally, begin right after your child is born. With compound interest and regular contributions, the funds will have more time to mature, and you won’t need to save as much each month or year to meet your goal.
#### UNDERSTAND THE COSTS
College expenses cover more than just tuition. By understanding all the costs, you can compare different schools and find ways to reduce expenses. This will help you set a clear savings goal.
#### CHOOSE THE RIGHT SAVINGS STRATEGY
If you’re planning to save early, consider using tax-advantaged savings accounts like 529 plans, which offer tax benefits and flexibility for education-related expenses. Another option is Coverdell Education Savings Accounts (ESA).
#### SET UP AUTOMATIC SAVINGS
Automating your savings can help your funds grow. Regular monthly deposits, boosted by compound interest, ensure consistent growth. Automation also prevents the temptation to spend the money elsewhere.
#### INVOLVE THE FAMILY
Let grandparents and relatives know about your college savings goals. They might contribute for special occasions like birthdays and holidays. For instance, you can include a link to your child’s 529 account in birthday invitations.
#### INVEST WISELY
Adopt a diverse investment strategy based on your risk tolerance and timeline. Many college savings plans offer various investment options. Regularly review and adjust your strategy as needed.
#### LOOK FOR SCHOLARSHIPS AND FINANCIAL AID
Investigate potential scholarships and financial aid. Scholarships provide free money, which can help offset some of the costs, although they can’t replace your savings entirely.
### WHERE TO INVEST YOUR MONEY
#### 529 SAVINGS PLANS
Consider setting up a 529 savings plan, a state-sponsored account for school costs. These plans offer different funds like mutual funds and ETFs. They are popular due to their tax benefits: you can deposit up to $15,000 tax-free per year, and the earnings grow tax-free.
#### TRADITIONAL AND ROTH IRAs
You can also think about investing in Traditional and Roth IRAs. These tax-advantaged accounts allow you to hold investments like stocks, bonds, and mutual funds and adjust them according to your needs and goals.
#### CUSTODIAL ACCOUNTS
Custodial accounts under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) allow you to put money or assets in a trust for a child. As the trustee, you manage the account until they reach adulthood (18 to 21 years old, depending on your state). Once they’re of age, they own the account and can use the money however they wish.
### IN SUMMARY
The cost of higher education is rapidly increasing. Starting to save early allows parents to maximize their investments’ growth. After deciding how much of their child’s education they’re willing to fund, parents can plan their contributions. A 529 savings plan often offers the most tax advantages and flexibility.
Remember, each family’s financial situation is unique, so tailor your plan to your individual needs and circumstances. Regularly review and adjust your strategy as your family and financial situation evolve.