If you are a new parent or have small children, you should immediately start putting money into a college savings plan.
After all, according to a U.S. News annual poll, tuition for the 2021-2022 academic year varied from $38,185 (for private universities) to $10,338 (for public colleges) (for the public, in-state colleges). College fees will continue to rise unless something changes in how people pay for education.
College costs typically rise at twice the rate of inflation each year, and this trend is projected to continue for the foreseeable future. Because the expense of college continues to increase, it is prudent for parents and grandparents to begin saving plans for their children/grandchildren when they are young.
A 529 plan is one of the most tax-efficient methods to save for college.
While traditional and Roth IRAs can be used to pay for college expenditures, parents should ensure that their retirement needs are met.
It might be challenging to know where to begin, especially when you have more pressing financial obligations such as childcare and rent. However, having a plan and saving early is critical in ensuring that you or your child are not forced to take out student loans and then be responsible for repaying that debt later.
The sooner you begin saving for your kids’ college education, the better. But before you start putting money aside, have a strategy. Saving for college, like any other significant expense, necessitates financial forethought, so here are some tips to help you save for your children’s education.
Financial Steps to Follow
1. Calculate the cost of education.
Consider the following factors when determining the cost of education:
- The kind of studies that your child could pursue.
- Will you send your child to a local or an international university?
- What is the basic cost of living if your child attends an international university?
Keep in mind, however, that these criteria may change over time. Review the plan at least once a year to stay current on the newest developments, and collect information from multiple sources to confirm that the cost of schooling and total cost of living is in the same area.
2.Establish a 529 Plan
If you want to save for your child’s or grandchild’s college education, one option is to make a tax-advantaged investment. These plans and accounts will assist you in saving money while keeping it safe from the IRS.
The savings initiatives, which state governments typically support, encourage people to save for future education costs. They are frequently tax-friendly because many states will allow you to deduct your contributions from your state income tax – and the money will not be taxed when you withdraw it for education.
Contributions made with after-tax dollars are restricted. In 2022, you can contribute up to $16,000 each year.
If you withdraw funds from a 529 plan, the funds are entirely federally tax-free (and most states do as well) as long as they are utilized for approved education costs.
The crucial thing, of course, is to continue contributing to your child’s 529 every year, preferably monthly. Otherwise, the interest on that $25 will not amount to much over the next 18 years.
3. Set up financial goals
We consider saving a series of steps toward a more secure future. It’s best to take things slowly at first. First, establish some priorities. We understand wanting to prioritize your children, but I’d prioritize retirement. If you have a 401(k), make sure you contribute enough to obtain the company match. Consider creating an IRA if you don’t have a 401(k).
Then, considering your savings goals, analyze your budget to calculate a monthly college savings amount. Set it to automatic if possible. It may not seem like much at first, but get started immediately and add more as you can, perhaps with presents or family contributions. A 529 plan, for example, will target your education funds and allow you to track your progress toward your objective.
4. Recognize your existing financial situation.
Now that you know how much is required to cover the education expense, you’ll need to know how much you have to set away each month to fill the difference.
Most people keep their money in cash, real estate, and other investments. You should consider how much of the assets above can be set aside for your children’s education. The idea is to create a list of assets dedicated to serving as your children’s education fund.
There’s no doubt that college costs are skyrocketing – even the prospect of paying for it can be intimidating for many parents. However, parents should begin saving as soon as possible to maximize their assets’ returns.
For most families, paying for college is more complicated than just writing a check each quarter. Instead, it is a combination of financial help, scholarships, grants, and money earned by the child and money given to tax-advantaged college savings vehicles by parents and grandparents.