College Savings Accounts - Basic Info For Parents

There are some people who argue that the college costs for some degree programs are beginning to outweigh their real-world usefulness and that parents don’t necessarily have an obligation to pay for additional schooling once their kids reach legal adulthood.

Skipping over the validity of such debates, there are still plenty of individuals who view higher education as a completely necessary evil. Many of these people don’t want their own kids to struggle with the same student loan debt that most of them still have hanging over their heads, but the cost of education is rising.

Start Early But Don’t Forget Your Own Future

It’s a good idea to start early when it comes to any sort of savings plan and it’s much easier to save money when your kids are too young to care about name brands or other status symbols. Besides, you probably already have several closets full of your kid’s extra belongings. So why not redirect at least some of your funds into a college account that will benefit them later? There are only so many toys they can play with at one time.

It’s always a good idea to have your finances in order before you start tackling future problems. However, parents often put college for their kids ahead of their retirement savings, which is a bad idea. You should ideally be saving for both at the same time. One college financial planner said that young professionals should try to save around 10 percent of their income for retirement and 10 percent for other planned expenses, such as purchasing property and/or the associated costs of having children.

You’ll have to examine your budget carefully in order to find out what you can currently afford to save. If 20% of your total salary is currently impossible, then simply halve what you can afford to save each month and put some money towards each goal. After all, parents shouldn’t have to miss out on their own retirement because they’re trying to help their kids.

Fidelity Insurance says that you should multiply your kid’s age by $2,000 to determine how much you should be saving each year for their education. This sum will typically cover about half of their college costs. The rate was developed for those using a 529 plan. However, it’s still a good general rule of thumb even if it doesn’t account for variables such as your salary and the cost of specific colleges.

It may be additionally possible that your kid’s grandparents and other doting relatives want to make a contribution towards their college, particularly when the child in question is still too small to realize they aren’t getting super large or expensive gifts from everyone at their parties.

Just approach this subject with tact. Don’t bring it up unless you are asked about what the child wants/needs as a holiday gift or are answering relatives who have directly questioned you about contributing something. Then mention it only once. Keep in mind that everyone has personal expenses of their own no matter how much they love your kids and no one ever likes being hit up for unsolicited donations.

Some Planning Tips

A 529 savings plan tends to be the preferred method of creating a college account for your kid since these programs often come with tax breaks. People using these programs can usually take money out of their accounts for college-related expenses without being hit with additional fees. However, there are a lot of different plans on the market so it pays to do your research in this regard. Most sources say that you should look for a long-term plan that provides you with some tax breaks.

Parents who can afford to do so may want to consider backing up these savings plans with taxable investments, such as brokerage accounts or diverse investment portfolios. Families may also want to start college investment portfolios based on their risk tolerances, simply because that money is often easier to access in emergency situations.

You additionally have to consider the age of the child or children in question. As is the case with retirement accounts, the further away the event is, the more risks you can safely take. The closer the event in question is, the more you want to look at fairly stable savings methods like stocks and bonds. It’s also a good idea not to cash in all your accounts until your children graduate. This allows you to have a back up system if something goes amiss.

If you don’t want to set up a savings program or simply can’t afford to do so, there are still lots of ways that you can help your college-bound kids, but that’s a subject for another article.


Image Credit: kennedyfotos via Pixabay.

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