How to start saving for your child’s education early – and why it’s important

How to start saving for your child's education early - and why it's important

 

How to start saving for your child’s education early

Whether you’re saving for your own child’s education or the children of loved ones, it can be extremely helpful to start your saving efforts early and put away as much money as possible every month, year after year. But why? And how?

This guide will help you understand the importance of starting early and show you step-by-step how to put together an effective plan that works no matter what your income level or family situation looks like today.

Paying for a college education is becoming more and more expensive every year. It seems like just yesterday college was affordable  but not anymore.

In today’s society, there is no longer a guaranteed job after graduation. Many jobs only require an associate’s degree or even some specialized training with high-paying jobs demanding at least a bachelor’s degree.

With people living longer, getting married later in life, and having fewer children, it’s never been more important to save money while you are young so you can send your kids to school without having them incur tens of thousands of dollars in debt before they even get started in their adult lives.

This is especially true if you have more than one child because chances are good that one will be interested in attending a different type of institution than another.

The best way to ensure that your children get all of their schooling paid for by someone else (the government) instead of having to pay out-of-pocket yourself is by starting early and contributing as much as possible every month towards their educational fund.

 

Here’s how to start saving for your child’s education:

How to start saving for your child's education early - and why it's important

1. Establish a separate savings account specifically designated for your child’s college education expenses. Do not deposit any money into this account unless it is specifically designated for higher learning costs.

Even better, set up automatic transfers from each paycheck directly into their savings account and then do not touch it until they reach college age – even then make sure that you leave enough cash on hand so that if something comes up unexpectedly, you won’t be forced to tap into those funds prematurely.

 

2. Start putting away small amounts of money as soon as possible. If you have a newborn, open up a 529 plan right away and contribute $25 per week ($1,300 per year).

As your children grow older, increase your contributions accordingly so that when they reach middle school age you should be putting aside $100 per week ($4,200 per year).

 

3. Consider investing in stocks and bonds through mutual funds or exchange-traded funds (ETFs).

While these vehicles carry additional risk due to market fluctuations, many investment professionals recommend including some percentage of stock market exposure within your long-term financial planning strategy, since historically stocks outperform other asset classes over time. 4. Pay off your credit card debt first!

 

Why is early planning so crucial?

Your child is growing up fast. Maybe you already have a baby on board, or perhaps you’re already in preschool.

Maybe you even have an older kid and are looking at potential college costs. Whatever stage of life you’re in, planning for higher education can provide peace of mind, especially if saving money comes naturally to you.

Early preparation will take some effort now, but leaving the money invested by the time your kids reach their teenage years will make life simpler (and stress-free) down the road.

No matter where they go—public school or private university—there are a few ways to ensure they’ll be ready when it comes time to graduate. Here’s how to get started.

 

Tips For Investing in Your Child’s Future:

 

I) Make a plan: Talk with your partner about what kind of lifestyle you’d like to provide once your children are out of high school, then figure out how much money that would require per year.

It may be more than you think tuition costs have been steadily rising over time, so expect to pay at least $50,000 per year for a private college or $20,000 annually for a public university in most states.

Then talk about how much money you’ll need to save each month to reach your goal.

If that number seems daunting, remember that every little bit helps and starting sooner rather than later is key when it comes to long-term savings.

 

II) Set up an automatic transfer from your bank account into an investment account every month so you don’t even have to think about it.

For example, if you’re contributing $100 per month to your kid’s college fund, set up an automatic payment system that transfers $100 from your checking account to a separate savings account on the first day of every month.

That way you won’t miss any payments and will still be able to use that cash for other expenses.

 

III) Get started now: Don’t wait until your kids are older; get them involved as soon as possible by opening a custodial 529 plan in their name (which is similar to an IRA).

These plans allow parents (or anyone else) to invest money tax-free while earning interest on those investments—the longer they’re invested, the more they can grow.

A 529 plan also allows you to change beneficiaries easily, which is handy if you end up having multiple children who want to go to college. The earlier you start saving, however, the less likely it is that you’ll tap into your retirement funds when they’re needed most.

Start small: Even though there’s no minimum amount required for a 529 plan, consider starting with just $50 or $100 per month.

As your income grows and expenses decrease down the road, increase your contributions accordingly.

You can always take advantage of catch-up provisions during certain times throughout life—for example, 50% bonus contributions are available through some plans after age 50 to encourage people who’ve put off saving for retirement to catch up before the retirement age hits.

 

Consider these options when saving for your child’s future

529 Plans, Coverdell Education Savings Accounts (ESAs), UGMA accounts, and Section 529 prepaid tuition plans.

These options offer several advantages including tax-free growth or accumulation of earnings, tax-free withdrawals when funds are used for qualified education expenses at eligible schools, and flexible withdrawal rules that allow students to borrow against their accounts without penalty if enrolled in an eligible higher educational institution.

529 plans often have a wide range of investment options; many financial institutions can provide information on 529 plan details.

The beneficiary need not be related to you, although you do control how the account is invested as well as any distributions from it.

You may also transfer assets from one account into another up until a year before a beneficiary turns age 18 without penalty.

ESAs must be established by parents who receive an income tax deduction for contributions.

Contributions are limited to $2,000 per year per student with a lifetime contribution limit of $14,000 per student ($28,000 total).

There is no age limit on ESA contributions, but there is a requirement that they remain under your control until they reach age 30.

UGMA accounts are custodial savings vehicles created by parents or grandparents where minors can invest money earmarked for college costs without triggering gift taxes.

In addition to these options, consider opening a bank savings account in your child’s name and making regular deposits—even small amounts will add up over time! Start now so you don’t have to scramble later!

 

Next steps in developing a long-term financial strategy

It’s never too soon (or too late) to begin planning for your future. Investing in yourself is critical because there are no guarantees in life.

With that in mind, take a few minutes today to look over some of these resources: Are you currently contributing enough money to your retirement account?

Do you have multiple investment vehicles outside of your 401(k)? Is now a good time to refinance a mortgage or consolidate credit card debt? What other areas of savings could you improve upon?

If there’s any financial topic on which you feel uncertain, don’t be afraid;it might be a good idea to ask an expert for advice! Financial planners can help with just about anything from budgeting to estate planning.

To find one near you, check out SmartAsset’s free matching service. They pair you with local professionals who specialize in whatever area of finance you need help with.

How to start saving for your child’s education early

They also offer free tools like their Retirement Planner and Financial Checkup. And if you’re looking for ways to save more money, here are 10 easy ways to save $1,000 fast!

The most common way people give up their power is by thinking they don’t have any. ~Alice Walker

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