Education is one of the fastest growing costs families face, so some saving is a virtual requirement if you plan to send your kids to college.
At least some of the money you put away for your child’s education should be invested in a 529 or similar plan. The reason is that these plans offer significant tax benefits. You can take out money tax free, and some states allow additional deductions for the initial contributions you make. To add a cherry to the top of the ice cream, it’s easy to switch who the beneficiary is. You can transfer funds from one child to another if necessary or even use funds yourself.
Stocks and Bonds
Kids quickly learn that money comes as a reward for work. But money can also work for your kids! Stocks and bonds are fabulous college savings options because they teach concepts such as financial risk, earned interest and smart market research and prediction. They also get your kids understanding the meaning of delayed gratification, as stocks and bonds are investments that take some time to mature in most cases. The younger your child is, the more you might want to direct your money here, because you have a little more time to make up for any mistakes you make.
The Piggy and Other Banks
Really young kids can’t process abstract reasoning as well as older children and adults. They get a better sense of what money is and how it works if they have something tangible to see. For this reason, let your child keep some of his education savings in his own piggy bank and watch it grow. When he has a considerable amount in the bank (e.g., more than $100), take him to the bank and help him open a general savings account. It’s okay to leave a little in the piggy bank so he still has some money to see and work with. Opening the account gives you the opportunity to talk to him about financial institutions and their benefits, and it gets him comfortable with basic banking processes such as making and tracking deposits.
Trusts allow you to put money aside for your child specifically for educational purposes under a trustee. If something happens to you, the trustee distributes the funds in the trust based on your wishes and current trust law. You can stipulate that your child doesn’t get the money in the trust unless he uses it for school, and you also can indicate that a specific amount is to be distributed for each year of education. Having your child’s money in a trust also shelters it from getting shifted back into your estate after your death, where it can be subject to tax.
Diversity Is Key!
Experts agree that a diversified portfolio is a more stable one. Your child’s academic savings portfolio has the same rules. Instead of trying to funnel all your money into one pool because of a specific benefit, select a handful of good options to decrease your financial risks. This way, even if one of the savings options fails and doesn’t pan out like you expected, your child still has some money and isn’t left out in the educational cold.
But how much to save…?
If you do a quick bit of Internet research, you will find various figures for projected educational costs. This lets you do the math for how much you need to set aside each year or month for every child you have. The trouble is, the amount you’ll need for even one child can strain your budget. If this happens, the golden rule is always something is better than nothing. Put aside what you can, and stress to your child that, if they really want to go to school, they need to step up and contribute, too. One thing not to do is tap your retirement accounts. You don’t have the time to build up another cushion the way your child does, and paying for his school from these accounts can leave you financially dependent on your child later on in life.