How This Year's Tax Refund Could Kick-Start Your Child's College Fund

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KEY POINTS

  • The earlier you begin saving, the more time compound interest has to work its magic.
  • Small, regular savings deposits can add up by the time your child is ready for college.
  • No matter how old your child is today, it's never too early to think about funding their future.


College is only going to become more expensive. Saving now can give your child options.

Whether your child wants to go to college, trade school, or start a small business, a tax refund can serve as a good foundation for funding their dream.

How it works

The average refund in the U.S. this year is $3,400. Yours may be more or less, so bear with me. The goal is to give you an idea of how much any refund can grow. We'll just use the $3,400 figure as an example.

  1. If you invested the $3,400 into an account paying an average of 7% interest, it would be worth $11,492 in 18 years.
  2. If you invested the $3,400 but added an extra $100 per month, it would be worth $52,291 in 18 years.
  3. If you invested a tax return of $3,400 each year into the same account instead of making monthly payments, you'd end up with a total of $130,114 in 18 years -- and $65,514 of that figure is courtesy of compound interest.

Other ideas for funding future dreams

Since young families often depend on tax returns to help pay bills, cover unexpected costs, or enjoy a hard-earned splurge, I thought we might cover a couple of other ideas for saving for the future.

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The $1 a day method

Several years ago, I met a young single father raising a daughter. We got to talking about finances, and I loved how financially savvy he seemed to be. One of the things he's most concerned about is making sure his daughter can go to college when she's old enough. Because he worked as a furniture delivery person, he wasn't getting rich. Still, he wanted a way to save that he could stick with.

The young man told me that when the little girl was born, he began putting $1 a day away. He may not have much at the end of the year, but he had $365 to invest. The following year, he increased how much he saved by $1 a day, ending with $730 to invest. The next year, he raised his daily savings by another dollar and was able to invest $1,095. His little girl was four years old, so he planned on investing $1,420 that year ($365 times 4).

He may not end up with enough money to cover her entire education, but he was proud of the fact that he would be able to help.

Make savings a regular gift suggestion

My granddaughters are young. I cannot tell you the number of times their parents have asked me to donate to their 529 college savings plan rather than buy them one more toy they don't need.

Although donating to any of their 529s is far less fun than presenting them with another Lego set or adorable pair of shoes, their parents are right. A donation to a 529 is a gift that keeps on giving. The girls may not be aware of the gift, but one day they'll have an idea of how many people chipped in to make sure they could do what they wanted after high school.

If you haven't set up a 529 for your child, the process is easy. Once it's in place, you'll probably find that other people are happy to help you build it up.

No one can predict what the world will look like when your kids finish high school. What we do know is that having funds in place to help them achieve their goals will only make their lives easier. Take a look at our other personal finance resources.

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