Tips for Starting a College Fund for your Child
Becoming a parent is an amazing thing that will change your life forever.
Suddenly you have a new human to raise, protect and provide for. While the early days are spent securing everything a baby needs, thoughts soon turn to the future and figuring out what’s on the horizon. When you have a baby college may be the last thing on your mind, but it’s a good idea to start planning and saving early. While it may seem overwhelming to feel as if you’re planning out your child’s life without them, keep in mind that even if they choose not to go to college, having a little nest egg to help them get over the first few speed bumps of adult life can be helpful.
Starting a college fund can be as simple as setting aside a predetermined amount each month in a savings account, but for many, that is not the best plan. The power of savings will always be in earning interest and there are several better options for long term saving than a simple account at a bank. Depending on how old your child is the rate at which you need the account to grow can vary so starting early can be key to being successful. If figuring out how much your child might need for an unknown path through an unpicked college that has tuition rates at an impossible to predict price, it can be helpful to just consider how much money would help them get a good start in life. Remember that not all kids go to college, but having the money to go will be a big factor in your child’s decisions about their path in life.
Make saving a priority by coming up with a goal amount to save and a plan for how to get the money there. Some people at the beginning of their career may make smaller investments with a plan to invest more as their earnings go up, remember that this plan relies on you continuing to earn more and more money, so you’ll have to make some ambitious moves to keep everything on track. People who are established in their career or don’t see much upward movement on the horizon usually split the total amount out by how much they should contribute annually or even per each paycheck and set up an auto-withdrawal to keep it going.
The first step is to try to figure out how much money you think you’ll need. This can be a bit hard to pin down especially since college costs are so variable not just year to year but between one college and another and while you probably have aspirations that your child will decide to pursue higher education, you may not be in a position to make a perfect guess. That’s okay though because there’s a second helpful guidepost in the way of tax laws and deposit limits. Find out what type of account you want to start for your child, whether a Roth IRA type of account, an annuity, or a college savings plan, and find out what the maximum you can legally deposit in a year is, and try to meet as close to that maximum as you can.
Depending on where you live your local government may have a prepaid tuition program for the public colleges where you are. If this is an option that you think might be useful, it allows you to prepay tuition at today’s rates, however, most of the time the money is not transferable to out of state colleges so it’s good to keep that in mind.
Many parents will decide to get life insurance on their child that they can cash out when they turn 18 and while this may seem like an appealing plan, make sure you shop around and fully understand the terms of the agreement. You may find it more flexible and favorable just to put the money that you would have been paying in premiums into a high interest earning account. Hiring an investment advisor may not be a bad idea if you feel like there are too many options to make a good choice, they can help you to weed through the pros and cons of any plan.
Make a plan for what to do with any extra money that comes your child’s way such as monetary gifts at birthdays, holidays, and milestones. While you don’t have to put all of it away for college, letting your child see you put a percentage into savings not only teaches them a habit of taking care of their money but it is also a way to pack away tiny bits of money to help grow their account. You can also make a pledge to put a percentage of any bonuses or windfalls you receive into the account as well. Once your teen is old enough to work a part-time job you may discuss with them their own savings goals and if adding a small percentage of their earnings to their account would be something they would be interested in, but realize that they may want to save for something different like a first car or a senior trip. Be honest with them about what you have saved up and how their future account might look, it may help them decide whether they want to contribute some for the future.
Most people find that no one solution is perfect and due to deposit limits they may want to employ more than one plan. Again, talk to a certified investment counselor or a CPA to learn about each type of account, how they interact, the tax consequences of them, and their benefits and drawbacks.
Whatever you decide, just know that you are doing an amazing thing for your child. Whether you started right when they were born or much later, any amount of money that you can save up to help them get their start in adult life will be helpful and appreciated.