Sending your children off to college may feel very far away, but that time comes sooner than you think, regardless of how old your children are.
Therefore, it is essential to be prepared for this phase financially so that you can make sure that your children have access to the best options without putting a significant strain on your family’s finances.
There is a lot of good and bad advice on how best to save for college, so weighing the options that best fit your family is the only way to make sure you save smart. This article will explore the best and worst tips for saving for your child’s college fund to help you make the right decision.
Do: Start Early
It is never too early to start saving for college. Many parents open college savings accounts as soon as they return home from the hospital with their firstborn child, which is not necessarily a bad idea.
The earlier you start saving for college, the less you must contribute incrementally because the money has more time to add up. Make college savings a part of your monthly expenses early on, and you will be able to look at colleges with your children without stress when the time is right.
For example, if you start saving for college in your child’s first year, you will have 17-18 years to save. By contrast, if you wait until your child is ten to start saving, you will only have 7-8 years to save.
In the second scenario, you will have to contribute double the amount each week or month to save the same amount of money.
This can put a significant financial strain on your family depending on how much you need to save for either multiple children or advanced degrees.
Don’t: Wait Until the Last Minute
Assuming that you will figure out college savings later is a dangerous game to play. You are relying on yourself to remember to do research and set something up, but it is easy for life to get in the way and prevent you from getting it done.
If you wait until your child is in middle school or even high school to plan for college savings, you will miss out on many years of compounding interest. That interest means that your money is working for you.
The more you frontload your savings, the longer the interest must work for you and make you more money to put towards college. This is the biggest reason it’s important to get started saving for your children’s college funds in their first five years.
Do: Investigate 529 plans and Roth IRAs
There are several different options for college savings. First, research the different options and find the one(s) that aligns best with your family’s college savings goals.
Then, depending on what works best, you can put all your money in one savings avenue or spread it out amongst a few different options.
Here are some of the best options for college savings.
529 plans are one of the most popular college savings vehicles available. They are straightforward to open, and you can start saving money toward your child’s future education.
You can set money aside over time in this account, and the funds you contribute are tax-deductible, which is beneficial as well. In addition, other family members, like grandparents or aunts and uncles, can also contribute money to your child’s 529 plan.
The money in a 529 plan can only be used towards eligible higher education institutions and the associated expenses. However, it is an excellent option if you know that your child will go to at least a community college or four-year university.
If you think there is a possibility that your child may not go to college or may pursue a nontraditional educational path, you may want to weigh whether this is the right decision for your family.
Although a Roth IRA is typically used for retirement savings, that’s not all you can do with it.
You can use these popular after-tax investment accounts to fund your child’s future in education and beyond. In addition, because you have already paid taxes on the money, you do not have to worry about future tax rate fluctuation on the account’s balance.
Using a Roth IRA to save for your child’s future is an excellent choice because the money can be used for anything; it is not limited to only direct educational costs. For example, if your child wants to start a business, make an investment, or make a large purchase like a car or a home, and the Roth IRA money can be used.
Because a Roth IRA does not have restrictions on what it can be spent on, many parents open both a 529 and a Roth IRA for their children to access both types of funds.
It is worth noting that only the people who set up the Roth IRA can contribute to it, so if this is important to you, it might not be a good option.
Don’t: Rely on Financial Aid and Scholarships
Many parents who avoid saving for college hope that their children will qualify for financial aid or scholarships to pay for the bulk of their education.
While your child may qualify for one or both things, there are good reasons not to rely solely on these things to fund your child’s education completely.
Although financial aid is a great option to help cover the cost of college, it has some significant pitfalls. First, it will set you and your child up with potentially a large amount of debt at a very high-interest rate once they graduate, which can be challenging to manage and cause long-term financial strains.
Scholarships can be a helpful way to augment some of your child’s college education. Many colleges and universities offer scholarship programs for specific degree programs or sports teams, and they can significantly reduce or eliminate your out-of-pocket college expenses.
How much impact scholarships can have been very dependent on the situation, and it is something you may not know until your child is applying for college. It is essential to have savings ready as a backup because only a scholarship will cover all costs for their entire four years, in very rare cases.
Do: Check the Performance of your Accounts Regularly
Even if you set up your child’s college savings accounts early, it is important not to set them up and forget them. Many parents think that the hard work is done once the account is set up until it is time to cash it in for college.
Make a plan to check in on it at least once per year, but ideally several times per year. This will help you keep track of its performance, notice opportunities for changes to your investments or contributions, and more.
Checking in on how things are going consistently will help ensure you have enough money in your account when you need it. In addition, this proactive approach to managing your child’s college savings will pay off in the future, so you will not encounter any surprises when it is too late.
Don’t: Plan To Use Retirement Money
Many caring parents may be tempted to dip into their retirement savings accounts to pay for their children’s college education.
While this often comes from a good place of wanting to help your child succeed, it is never a good idea to use retirement funds to pay for college.
Using retirement savings to pay for college will incur penalties for early withdrawal and decrease the amount available to you when you retire, which can impact both you and your child’s future. The best thing to do is to set them up with their own accounts to save for them and assist them instead.
There are many ways to prepare in advance to pay for your child’s college education. It is essential to research the options and decide which one will work best for you and your family.
Even if you don’t intend to pay for all your child’s schooling or if they do not end up wanting to go to college, it is always good to have some savings to help them get started in the future.
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