Starting a college fund for your children is as simple as making the conscious decision to save money. It’s ensuring that the money you save can grow as your children do that can be the tricky part of the process.
The good news is that there are a number of ways to save for college. From mutual funds to 529 plans, there is a long laundry list of ways that you can begin saving money. Let’s examine how you can start your child’s college fund today.
1. Save Some Change
If you often pay in cash, then you’ve likely got a large amount of change sitting around. Depending on how young your child is or whether you even have one yet, you may want to start small. Something as simple as saving your change in a jar helps you get started.
2. Open a Savings Account
Savings accounts tend to have a maximum of about 1.0% APY with the average amount being around 0.5% to 0.7% APY.
While they won’t grow your principal very quickly, they can help provide you with a safe place to temporarily store your child’s college fund until you have enough saved to invest in stocks, mutual funds or a 529 plan.
3. Invest in Stocks
Stocks are relatively risky to invest in with regards to the short term, but they will generally appreciate over the long term. This can make them a solid 10- to 18-year investment.
All they require is a small amount of principal to purchase the stocks, then some careful management over the years. You may need to sell certain stocks when they’re ripe for sales, then purchase new ones over the years to ensure that you can maximize your child’s college funds this way.
4. Mutual Funds
Mutual funds allow a group of individuals to invest in stocks, bonds and other similar assets. Mutual funds are managed by experienced investors or investment companies who invest the fund’s money in an attempt to produce income for the fund’s investors. The fund manager can purchase just one stock or several different types of stock to mitigate the risk of loss.
If you don’t have enough to begin independently saving money for your child’s college, then mutual funds may be a bright option for you.
5. Roth IRAs
Roth IRAs are accounts designed to give a tax break when you reach retirement age. What many people don’t know is that it can also be invaluable in saving for your child’s future college education.
The one thing you need to know about a Roth IRA before you invest in it is that it requires a certain degree of commitment. Most companies require at least $200 a month or $2500 a year to keep your Roth IRA account going, but this should give you more than enough money to support your child when college comes.
6. 529 Plans
529 plans are similar to Roth IRAs in that they provide a tax advantage after a certain amount of time. They’re plans defined to fund college tuition without the requirement to pay federal taxes on any of the money you earn from them. Also 529 plan earnings are generally not subject to state tax as long as the funds are used for qualified education expenses.
The difference is that 529 plans are much more flexible than Roth IRA plans in terms of how much money you have to invest. Some plans can be funded with as little as $15 a month. – Couple that with their low maintenance and simplified tax reports to see why 529 plans are one of the more popular ways to save for your child’s future college expenses.
7. A College Portfolio
One additional approach to saving for college involves combining several methods into a savings portfolio. A portfolio can include any number or combination of savings plans. This can get somewhat complicated, as paying taxes on multiple types of savings and their respective earnings can be tricky. A portfolio made up of different types of investments may help preserve the overall value of your savings during an economic downturn. Its inherent diversity ensures that all your eggs aren’t in the same basket experiencing the same highs and lows of the market.