Parenting can be really expensive. According to recent research from The Brookings Institution, raising a child from birth to age 17 costs over $300,000. This doesn’t even include college expenses. One good strategy to help your kids become successful adults is to set up a college fund. Here’s how you can get started.
### The Reality of College Expenses
A U.S. News survey revealed that for the 2022-2023 school year, tuition fees averaged $39,723 for private colleges and $10,423 for public, in-state colleges. And these costs are expected to keep rising. Typically, college expenses grow at twice the annual inflation rate, and this trend is likely to continue. With a steady 6% inflation rate for college costs, here’s an idea of what you might face when your kid is ready for college.
### Strategies for Saving for College
Building a solid college fund requires planning and commitment. Here are some practical tips:
#### Start Saving Early
The earlier you begin saving, the better. If you start when your child is born, small, regular investments can grow significantly over time, reducing the need for large contributions later.
#### Understand the Expenses
College costs include more than just tuition. Knowing all the expenses helps you compare different schools and find ways to reduce costs, giving you a clear savings target.
#### Choose the Right Savings Platform
Certain savings accounts can help if you’re starting early. Look into tax-benefited options like 529 plans or Coverdell Education Savings Accounts (ESA).
#### Automate Your Savings
Set up automatic deposits to your college savings account. This ensures consistent financial growth and prevents you from forgetting to contribute or using the money elsewhere. Compounding interest will also enhance your savings.
#### Encourage Family Contributions
Let your family know about your college savings plan. They might want to contribute during special occasions. You could even include a link to your child’s 529 savings account in birthday invitations.
#### Invest Wisely
Diversify your investments based on your risk tolerance and time horizon. College savings plans often offer various investment options. Review and adjust your plan as needed.
#### Explore Scholarships and Financial Aid
Keep an eye out for scholarships and financial aid. While they shouldn’t replace savings, they can help cover some costs.
### Where to Put Your Money
#### 529 Savings Plans
A 529 savings plan is a state-sponsored investment account designed for education expenses. You can withdraw money tax-free for eligible educational costs, including college and K-12 tuition.
#### Traditional and ROTH IRAs
Consider Traditional and ROTH IRAs. These accounts offer tax benefits and can hold investments like stocks, bonds, and mutual funds.
#### Custodial Accounts
UGMA and UTMA accounts are custodial accounts that hold money or assets for minors. Once your child reaches adulthood (18-21 years old, depending on the state), they gain control and can use the money as they wish.
### The Takeaway
While the cost of college is high, starting to save early can yield better returns. Decide how much of your child’s education costs you’re willing to cover and plan your monthly contributions. Options like 529 savings plans, brokerage accounts, or prepaid tuition plans offer various benefits, with 529 plans being particularly tax-advantaged and flexible.
Remember, each family’s financial situation is unique, so tailor your college savings plan to fit your needs. Regularly review and adjust your strategy as your financial circumstances change.