Are we saving enough for our kid’s college?
Since when should we start saving to be able to sponsor our kid’s college?
Do we need to save monthly, yearly or weekly?
How much should we save and what will be enough for our kid’s college?
These few questions are sure to trigger your mind when you see your little toddler has started reading books and is trying to gauge different words. And it’s not just the tuition fee that you need to sponsor but the cost of living in college/university as well.
How much is the average cost of college?
On an average, this costs that vary from university to university but on an average comes up to $5,000 and $50,000 per year for tuition fee and Costs for food and living are normally between $8,000 and $12,000 per year. This cost will differ if your kid is looking to join a university in some other state and will sum up around $24,930 for out-of-state residents attending public universities and $33,480 at private colleges. Most of the top American Universities (like Yale and Harvard) will typically cost around $40,000 a year.
If you’re not sure how you’ll be able to save for your kid’s college then here are a few tips to help you with it:
A 529 Plan:
529 plan is designed specifically for education savings and will keep your money separate from retirement savings. The various aspects of the 529 plan that you need to focus on before opting for it are:
- The money in a 529 must be used for qualified higher education expenses, or else will be slapped with a 10% penalty. If the amount in your 529 is withdrawn for anything other than qualified higher education expenses, the amount equal to scholarship won’t be taxable, only the earnings in the account will be taxed and penalized
- There are a lot of 529 plans, which come with their own annual fees and operating costs.
- Generally, 529s have tax advantages, such as earnings that aren’t subject to federal tax. Almost every state has its own 529 plan.
- You can put your money in any state’s 529, and you may find that there are some state plans you like better than your own. So you’ll want to do some research before signing up.
- You’re allowed to change the beneficiary of a 529 plan to any member of the original beneficiary’s family.
- There are no income limits on 529 plan contributions, so they’re available to everyone.
IRA or Roth IRA:
An Individual Retirement Account is an investing tool used by individuals to earn and designate funds for retirement savings, also referred to as individual retirement arrangements, IRAs can consist of a range of financial products such as stocks, bonds or mutual funds. Simple IRA is the traditional one whereas Roth IRA is introduced with a few alterations. You can read further to understand the various aspects of an IRA and can decide which one you want to opt for:
- In the traditional IRA, the contributions made are deductible on both federal and state tax returns for the year you make the contributions and the withdrawals from traditional IRA are also taxed at ordinary income tax rates.
- The contributions you make to a Roth IRA can be withdrawn at any time for any reason.
- The earnings on your investments in a Roth can be taken out for more of your needs, including education expenses, buying your first home, and eventually for a retirement plan.
- You can withdraw up to the amount you’ve contributed without taxes or penalties at any time and for any reason. For example, if you’ve contributed $50,000 to your Roth IRA and it’s grown to $75,000, you can withdraw up to $50,000 any time you want without consequences.
IRA vs 529 plan has always been a huge battle, but the biggest reason to choose a Roth IRA plan is the flexibility you have to use the money for various purposes in Roth IRA, whilst 529 is a dedicated plan for college/university only.
This simple 2K rule says that you need to multiply your child’s age by $2,000 to stay on track to cover half the average cost of a four-year, public university. If your kid is 5 years old then Multiply 5 with $2000, that is you should have $10,000 as savings when your kid’s age is 5 year and by the age of 18 when generally your kid goes to college or university you should have 18*2000= $36000 as savings. You must be thinking that this amount won’t even cover 4-year food expenses or cost of living then why to opt for this rule?! Well, the 2K rule gives a kick start to your financial planning for kid’s college tuition. At age 18, the typical time kids head off to college, your $36,000 fund could reduce the cost of the university by 50 percent with the rest coming from other financial aids, scholarship, student loans, and family earnings. If you start this planning since the time your kid is born then it will be way beneficial for you as every year you need to save $2000 per kid and this pre-planning will reduce the burden of urgent requirement of finances at the 11th hour.
Let me simplify it more for you if you’re trying to save $2000 per year then:
$2000 in 1 year (12 months) maintaining an average of 30 days per month you need to save $167 approx. To simplify it further, keeping an average of 30 days per month in a year you need to save only $5 per day to reach the final amount of $2000 per year as saving. Keeping a piggy bank to stock away from your daily savings and at the end of the month depositing the same amount somewhere can prove to be the simplest solution to crack this 2K rule.
Different people have different financial requirements and according to the requirements, these are the various available options to choose from depending upon personal needs.
Rest assured these methods have been personally tried and tested and a Bonus Hidden Point is:
Your kid might not even opt for college or can even land up getting a full scholarship, so planning for your long-awaited vacation to your dream destination might come in handy!!