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4 Ways In Which You Can Save To Help Your Child Go To College

savings for child

A child is a source of immense joy and helps you discover a new meaning in life. But parenthood also places on you complete accountability for the needs and wants of another person.

You very well know that raising a child is a costly affair. According to a 2014 report by US Department of Agriculture, you need about $245,340 to raise a child into adulthood. Factor in inflation and shooting college costs and it will require much more to raise a baby born in 2016.

Many parents worry about funding children’s growing needs and aim to save for the same purpose. But according to a survey by finaid.org, an average family planning to save $38,593 per child for college only succeeds in putting away $19,784 which is less than adequate.

If you have a baby or are planning on having one, here are a few tips for you to save wisely and smartly to ensure the future financial security of your little one.

1) 529 Plan

529 plans are state sponsored plans that allow you to invest after-tax money towards future college expenses. Your money is invested in diversified options like mutual funds. The earnings are not taxed as long as you spend the money on specific college-related expenses.

The large annual contribution limits allow you to invest up to $14000 per parent per beneficiary per year. You can also switch beneficiaries if any of your kids choose not to go to college. There are limits to maximum lifetime contributions varying from $200,000 to $400,000 according to different states.

One of the drawbacks of the plan is that you do not have a say in which investment vehicle your money goes. You can make changes once a year but for the rest of the time your money is managed by someone else. Also, there are annual operating fees and other costs. Different states have different 529 plans. So do your research well and choose a 529 plan that best suits your needs.

2) Coverdell Education Savings Account

This is a type of trust or custodial account where you can park savings for your child’s college education. The invested money grows tax-free and the withdrawals are also not taxed. Unlike 529 plan, you can use money from this account for other expenses like school fees, tutoring expenses, or to pay for after-school programs or text books.

In Coverdell education account, you also have the freedom to invest money in ways you want and you can also make any number of changes to it in a year. There is no adverse impact on your child getting financial aid in future and you can also switch beneficiaries according to future needs. But remember that you can only contribute until your child turns 18 years of age.

The biggest drawback of this plan is that you can only make an annual contribution of $2000 per child per year in one or multiple ESAs (educational savings account). Also, there are income limits which bar parent/parents with gross income over $110,000 or $220,000 in cases where joint returns are filed, from opening the account.

So if you are happy with the $2000 limit and would like to dip into the savings kitty to fund other educational needs, then Coverdell education savings account is right for you.

3) Stock

Investing in the stock market is a great option if you are willing to gain awareness and knowledge about it.

Depending on your risk appetite you can invest in stocks, bonds, mutual funds or Exchange Traded Funds (ETFs). ETFs are great because they are more conservative as compared to equities. You can also consider investing in funds that track overseas indices to further diversify your portfolio and take advantage of high-growth foreign markets.

US treasury bonds are safe, give guaranteed returns and are immune to rise and fall of markets. They are also less expensive to acquire and interest accrued is tax free. If you use the fund to meet college expenses then you will not have to pay federal taxes if you are under specified income limit.

4) Consider Alternatives

A young couple will suddenly see their household expenses rise dramatically with the arrival of the baby. You may find it hard to save anything when there are so many unexpected expenses and needs to attend to.

Make a conscious attempt to cut corners and save wherever you can. Doing away with vacations, night outs, expensive purchases and high-value buys, and learning to make do with as little as you can will help you save valuable dollars for future needs. Shop sales, make use of coupons, look out for online sales and freebies from big brands, and buy in bulk and freeze food to lower living expenses.

Some companies offer college savings plans that enable you to automate contributions making it easier to save. Some employers also offer grants and scholarships to employees’ children to help offset some of the costs.

Pre-paid tuitions are another great option for parents looking to save for children’s education. This allows you to buy tomorrow’s college tuition at today’s costs. The state guarantees your money and most plans are flexible enough to accommodate children’s preference while choosing school or college.

Conclusion

Education is expensive but it is a great investment in your child’s future. Studies show that a person with a college degree earns up to a million dollars more than a person with a high school degree during the course of his or her life. So, plan today to ensure your child has a debt-free and rewarding college education.

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