Saving money for your child’s college education is a key step in ensuring their future success. However, many parents struggle with this task and are unsure of the best strategies to employ.
In this article, we will discuss various methods to save money for college, from treating savings like a monthly bill to enrolling in prepaid tuition plans and utilizing Roth IRA accounts.
Treat Savings Like a Monthly Bill
One common mistake many individuals make is waiting until the end of the month to save whatever is left over from their income. Unfortunately, this often leads to a dwindling balance and insufficient savings.
The most successful savers are the ones who treat their savings like a bill they must pay each month. They decide how much they’ll put aside each month and do it without failure and without excuses. Start paying your savings first and watch your child’s college fund grow.
Keep Savings in Your Name
You might think it makes sense to open a college savings account in your child’s name, as your son or daughter will be the ultimate beneficiary. However, this could compromise your child’s financial aid.
Students don’t lose any financial aid if they have $3,000 or less in a savings or checking account. But once the amount climbs beyond that, 20 cents is subtracted for every extra dollar. Keep the account in your name to maximize your financial aid.
Enroll in a Prepaid Tuition Plan
You don’t want to take risks with your child’s college funds, but more stable investments often deliver modest returns. A prepaid college tuition plan that grows as tuition rises can be an excellent alternative to a traditional savings plan. Tuition tends to grow between four and six percent each year, so the money in a prepaid tuition plan can go much further. Some states also offer tax deductions and credits to parents contributing to prepaid tuition plans, which can free up more money for college savings.
Some of the best-prepaid college tuition plans are 529 plans. The amount you deposit into a 529 prepaid tuition plan can grow without being taxed. These plans usually have high contribution levels and no income limits, allowing you to grow your child’s college fund quicker no matter what your earnings.
Ideally, prepaid tuition plans are for parents that want to help their child’s college education. If your child decided not to attend college, you can transfer the account to another beneficiary, such as another child, without penalty. However, if you want to take the funds out, tax penalties and other fees may apply.
Get a Roth IRA Account
You might be more familiar with a Roth IRA account as a type of retirement savings account. However, it can be a great option for college savings as long as your income isn’t more than $129,000 a year for singles or $191,000 for married couples.
Like a 529 plan, you contribute up to $5,500 per year after tax to the account, or up to $6,500 if you’re over 50. You can take out your money when you retire without any tax penalties. But many people don’t realize once you’ve had a Roth IRA for five years, you can use its funds to pay for eligible education costs without any tax penalties.
Roth IRAs are so appealing because you won’t face financial penalties if your child doesn’t attend college, unlike a prepaid tuition plan. You can simply keep the funds in your Roth IRA and use them when you retire. Just note those income and contribution limits before signing up.
What is a 529 Plan?
The 529 plan helps families save for future college costs. Every state offers 529 plans. The investment made to a 529 plan grows tax-deferred and withdrawals are tax-free if used for qualified education expenses.
Think Carefully About Your Purchases
Think carefully when you’re about to spend money unplanned. Ask yourself whether you really need that new outfit or restaurant dinner. Taking a moment to reflect on your purchasing and how it will set back your savings goals can be all it takes to talk yourself out of impulse spending.
Take the same approach with your ordinary spending habits. It’s easy to get used to an espresso from your local café each morning and takeout meals for lunch, but do you really need them? Those small but regular amounts can really add up over time.
Extend Yourself to Save More
Too many parents get complacent about their college savings goals. According to Fidelity’s 2016 College Savings Indicator Study, 45 percent of parents felt they could have saved an extra $100 a month for their child’s college fund. Half of these people estimated they could have put away an extra $200 a month. If you can afford to save more, the extra interest your savings would attract could be substantial.
“For many families, finding an extra $50 or $100 per month may seem out of reach, but these extra dollars, consistently saved, could potentially boost college savings by nearly $20,000 or even $40,000,” Keith Bernhardt, the vice president of college planning at Fidelity, told Forbes.
Extending yourself and your savings more each month could make a massive difference when your child heads to college. If you want to save money for your child’s college education, there’s no better time than the present to put these smart financial strategies in place.
