Creative Approaches to Growing Your Child’s College Nest Egg
Raising kids is expensive. Research from The Brookings Institution shows that the average cost of raising a child to 17 is over $300,000, and that number doesn’t even include college expenses. Setting up a college fund is a smart way to help your kids succeed as adults. Want to know how to get started?
### Understanding College Costs
A U.S. News survey revealed that tuition for the 2022-2023 school year averaged $39,723 at private colleges and $10,423 at public in-state schools. If current trends continue, college costs will keep rising, often growing twice as fast as the annual inflation rate. Assuming a 6% inflation rate for college costs, it’s crucial to plan for what tuition, fees, and living expenses might look like when your child or grandchild is ready for college. Here’s how you can start saving:
### Strategies for Building a College Fund
1. **Start Saving Early:** The earlier you begin saving, the better. Starting a college fund at your child’s birth can lead to substantial growth over time, thanks to compounding interest. This approach reduces the need for large contributions later on.
2. **Get to Know the Costs:** College expenses cover more than just tuition, including fees and living costs. Understanding these can help you compare schools and find savings, allowing you to set clear savings goals.
3. **Choose the Right Savings Platform:** Consider using tax-advantaged accounts like 529 plans or Coverdell Education Savings Accounts (ESA) to maximize savings.
4. **Automate Your Savings:** Setting up automatic deposits into your savings account ensures consistent growth, helping you maintain regular contributions and harness the power of compounding interest.
5. **Encourage Family Contributions:** Share your college savings goals with family members who might want to help during holidays or special occasions. Consider including a link to your child’s 529 account in invitations to make gifting easy.
6. **Invest Wisely:** Diversify your investments based on your risk tolerance and timeline. Many college savings plans offer various investment choices, so review and adjust your strategy as needed.
7. **Look for Scholarships and Financial Aid:** Stay informed about scholarships and grants, which can significantly reduce college expenses.
### Best Places to Save
– **529 Savings Plans:** These state-backed accounts let you withdraw money tax-free for qualifying educational expenses, making them a top choice for college savings.
– **Traditional and ROTH IRAs:** These retirement accounts can also be used for education savings, offering different tax benefits and investment options.
– **Custodial Accounts:** Accounts like UGMA and UTMA allow you to save for minors and transfer ownership when they reach adulthood. However, the funds aren’t required to be used for education.
### Conclusion
While college costs are on the rise, saving early can improve your return on investments. Decide how much of your child’s education expenses you want to cover and create a plan for regular contributions. Options like a 529 savings plan offer flexibility and tax advantages. Remember, each family’s financial situation is different, so tailor your college savings plans to fit your needs. Regularly review and adjust your approach based on changes in your finances and family goals.
