Saving for your child’s future education is an often forgotten essential given the cost of education and its propensity to increase over time. Finding the money to set aside can be difficult let alone figuring out how to invest the money for maximum results should you even know this is an option. Time also plays an important role in your ability to accumulate funds for your child’s education (and future earning potential). Consider the following suggestions and open your savings accounts at the right time – the sooner the better.
Finding the Money to Save
Start by examining your spending habits and pinpoint areas where you could reduce the amount you spend or do away with completely.
An expense you could avoid and apply toward a college account is going out to lunch. Instead of dropping money at a restaurant bring a brown bag with you. You’ll be surprised how much this will save you over the course of a working month or year.
As an example a new mother decided that instead of buying coffee each morning she would make her own. Over the course of a year she saved $1,500. Because of the magic of compound interest, saving as little as $50 a month can result in a considerable amount at the end of 18 years.
529 College Savings Plans
The beauty of 529 investment accounts is that they allow you to set money aside for your child’s education that grows tax-free. As long as you use the money for your child’s education the government will not tax any of it when you withdraw it.
These plans do have a lifetime cap that varies from $235,000 to $300,000 depending upon the state you live in. The good news is you can open an account for as little as $25.
Prepaid College Tuition Plans
If your child is thinking about running a business one day, you could enroll them in WSU’s online MBA degree in order to save money and time. That same sort of forward thinking is used when you make payments toward your child’s college tuition to a prepaid tuition plan. These plans allow you to pay for your child’s college now at today’s prices. You could conceivably pay for your child’s entire 4-year degree before they’re even out of diapers.
A Custodial Account is one in which you open in your child’s name but you retain control of until the child reaches adulthood. You can decide how much to invest, when to deposit money, and how to reinvest it if you decide to. You also can decide when to withdraw the funds and how to spend them for your child.
Coverdell Education Savings Accounts (ESA)
Education savings accounts are similar to IRAs only they are used exclusively for education as opposed to retirement. You can deposit up to $2,000 each year using post-tax dollars. As long as you use the funds for educational purposes the funds will grow tax-free, and neither the contributions or interest will be taxed when you withdraw them.
So when your planning or indeed when you have a child you need to think about his/her education from day one and not leave it till later. Find the plan that will work best for you and start saving right away and they’ll be going off to college before you know it.
***Photo thanks to K.W Barret***