What’s the best way to create and add to a child’s college fund? It depends on what your goals are, how many years until college bills will come due, and what strategy you plan to use for building up enough money to cover all or most of your education. The good news is that there are plenty of options and, best of all, you don’t need to be wealthy to sock away a respectable amount of capital for a future college degree. Most of the initial steps are commonsense moves while others require specific knowledge about programs and processes. Of course, the most important step of all is simply to get started. Here are a few of the most effective techniques for nurturing a financial fund that will allow your child to focus on coursework and not tuition expenses.
Set Up a Designated Account
Get started by contacting your bank or brokerage firm and letting them know you want to create a separate account for the sole purpose of saving for your child’s schooling. Some institutions offer special arrangements that let you send a portion of every paycheck directly into such accounts. Be sure to let them know whether you intend to create a 529 plan because the initial paperwork will be a bit different.
Cash Out a Life Insurance Policy
Many parents decide that it’s wise to use a life insurance policy to cover the rising cost of a four-year degree than anything else. This is especially true for adults who started their families after the age of 35. The thinking is why not sell the policy now through a life settlement and use the money to directly finance the child’s education? If you’re wondering exactly how much your current policy is worth, you can use a life settlement calculator to get started to see eligibility requirements and find out how much you can get. For many adults, this is the least complex and fastest way to add a significant amount of funds to an education savings account.
Add College Fund in Your Monthly Budget
Even if you have a large initial deposit amount to get the fund started up, the real secret is regular contributions. Re-work and organize your monthly budget and see how much you can set aside. Treat the deposits as separate, line-item expenses. Consider using college fund, to name the expense. Adding a fixed amount every month will help principal and interest expand considerably.
Set Up a 529 Plan
Many parents use a tax advantaged arrangement called a 529 plan to put money aside for a four-year degree program that won’t begin for several years. Note that you do have to pay tax on your earnings before you put them into the 529, but after that, the funds grow tax-free. What about pulling the money out to pay school fees? Once the degree program begins, you can withdraw whatever is needed for school-related expenses and not pay any tax on what you take out. A 529 is much like a Roth IRA because it’s funded with after-tax earnings, but it has the huge advantage of allowing growth and withdrawals to avoid all taxation.
Photo by Annie Spratt