We excel at stocking our kids with essential back-to-school supplies this time of year. But as parents, do we receive a passing grade when planning our child's college savings? Well, it's time to sharpen our pencils. Here are five easy steps to get you started.
1. Develop your goal
The process starts with understanding your expectations for funding your kid's education. That includes getting familiar with potential costs of a college education, which continue to steeply rise. According to The College Board, four years at a public university costs nearly $86,000 today. In 18 years, that'll run closer to $222,000, assuming a 5% average annual college inflation rate. To work toward covering those escalating costs, it's crucially important to come up with a strategy.
Your strategy should include how much of your child's education you'd like to pay. Maybe that means footing the entire bill, half the cost, or tuition only. Make sure your strategy also takes into account how much money you can afford to contribute. While you can't control the level of scholarships, grants, or loans your child will receive, you can control the amount you save for education. The more money you've saved and invested for college, the more control you'll have in figuring out how to fund it.
2. Understand your options
There are many ways to save for education. The most popular savings accounts include the 529 college savings plan, Coverdell education savings plan, and custodial account. Your individual goals and circumstances will help determine which option is most appropriate for you. For example, if saving on a tax-advantaged basis is important to you, then the 529 or Coverdell will be your best bets. If you want to contribute more than $2,000 annually, the Coverdell won't work for your situation. If you prefer the assets to be considered yours (as the parent) indefinitely, then a custodial account doesn't make sense. Make sure you know the specifics before opening and funding an account.
3. Start saving early
It's never too soon to start saving for college. Just like cramming for a big test at the eleventh hour isn't a smart idea, delaying saving for college until your child is a teenager isn't advisable, either. The longer you have to save, the more you can take advantage of compounding growth -- reinvesting dividends and interest so they, too, can earn dividends and interest. Time is your biggest asset, so start early, even if that means saving only a small sum each month.
4. Stay on track
Once you've developed a strategy and determined the best account for your needs, explore the options for systematic investing. That means investing a specific amount of money on a regular basis into the plan. Even better, setting up an automatic monthly payment is an easy, proactive, and foolproof way to build a nest egg for your child's education.
5. Increase contributions
Look for ways to boost your contributions to the plan. For example, dual-income parents typically spend hundreds of dollars each month on child care. When your kid starts kindergarten, parlay that monthly dollar amount into the child's college savings account. You won't miss the money because you're already spending it. Or if your boss is tickled pink and gives you a salary bump, consider increasing your kid's education savings account with part or the entire amount of your raise.
Your child will be a dorm dweller before you know it. College is right around the corner, so get started saving for it today.