9 Tips For Setting Up A College Fund For Your Kids

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Setting up a college fund for your kids is a smart decision that can potentially save you a lot of money in the future. Think of the college fund as an investment in creating your child's future. If you're curious on how to start, here are 9 simple tips that can help you.

1. Start Early

It's never too early to start saving for your child's college education. According to most experts, setting up a college fund for your kids should start as early as the day they are born. The earlier you start, the less money you'll have to set aside from each pay check for their college fund. Thinking about setting aside roughly $25 per pay check from the day your child is born.

2. Set A Goal

When setting up a college fund for your kids, it helps to set a goal to allow you to calculate and make adjustments for your children's education. A good starting point is the average tuition paid for public universities in your state. Tuition costs from private universities are out-of-state colleges might discourage you because the costs are so high. Using a public university in your state is the appropriate benchmark for how much you should be saving.

3. Plan To Pay One-Third

The amount of money saved for a child's college fund should be at least one-third of the college expenses. That includes room and board, tuition, books and other miscellaneous cost. The reason why you only need to aim for one-third of the college costs is due to the other available sources for your child's college education. Expect about one-third of college costs to come from financial aid, and the remaining one-third from private loans.

4. Increase The Amount You Save Each Year

To adjust for inflation and the gradual increase of college tuition, plan on increasing the amount of money you set aside for your child's college fund each year. You can start at $25 per paycheck from the day your child is born, then bump into up to $30 dollars per paycheck the following year. Set a cap once you've reached a certain point with limited flexibility due to other expenses and bills.

5. Invest The Money You Save

If you're setting aside money for a college fund, why not invest some of that money rather than just earning the minimum interest? Typically, a parent will be looking to place college fund money within a savings account or stocks. A savings account is safe, but yields very little in interest. Investing in stocks is risky, but has a very a high return. The further away your child is from his or her college years, the higher the risks you can take on certain investments for a higher payout.

6. Know That It Is Cheaper To Save Than It Is To Borrow

Putting away money for your child's future will save you a lot more money than having to borrow money later down the road. The more money you have to borrow for your child's education, the more interest you'll have to pay when you are repaying the loan. However, the more money you put away in your child's college fund, the more money you will be earning in interest.

7. Open A 529 Plan

A 529 plan is a college savings plan that is operated by a state or educational institution. Many parents are interested in these plans because they come with state income tax deductions for certain states. 529 plans vary from state to state, however, you can invest in a 529 plan in a different state, regardless of what state you reside in, and the state where your child plans to go to college.

8. Set Up Automatic Deductions

If you open a 529 savings plan, set up automatic deductions from your paycheck. Once the automatic deductions are set, you don't have to worry about the money being set aside. In fact, you won't even notice it's gone if it never enters your regular bank accounts.

9. Don't Leave Everything Up To Financial Aid And Scholarships

Many parents often believe financial aid and scholarships will be enough to cover their child's college expenses. The truth is, there is no guarantee your child will receive a scholarship and there is no way of determining how much financial aid your child will receive. Always plan ahead by investing as much money as you can spare in your child's college fund. If your child is fortunate enough to receive a scholarship, the money saved can be set aside for any other expenses not covered by the scholarship, like spending money or a car to get around campus.

Last Updated: January 17, 2012
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