When Should New Parents Start Planning for their Kid’s Education?
As a parent, your responsibilities begin the day you hear the good news of your child’s arrival. Right from finding the best clothes, books, and toys to more significant decisions such as picking a good school, all of these aspects together constitute a part of your journey as new parents. However, while most new parents delve right into the day to day needs of their kids, not many pay attention to the financial requirements of raising a child from an early stage. Education plays a pivotal role, in an individual’s life. Therefore, it is essential for you to start focusing on it as soon as you can.
Here are some things to know about the right time to start planning for your child’s education.
When is the right time to start preparing?
Experts suggest that the sooner you can start saving and planning for your child’s education, the better would be the benefits. Parents often like to wait until their kids are of a certain age to discuss their future and ascertain whether or not they would be interested in going to college. However, it is advisable to set aside a pool of money that can be used for their college education even when they have not yet shown an interest in college. This way, you will be able to save a considerable sum of funds that can later be used for several kinds of reasons.
How can you save money for your child’s education?
1. Calculate your timeline
The first step in the planning process is to know how long you have to save and what you are saving for. For instance, are you saving up for a private high school or an Ivy League college? Based on this assessment, you will have a time horizon in mind. Some parents are very focused on setting high standards from the very start by picking private schools over a public school. If this is the case, you would require funds as early as when your child is 14 or 15 years old. However, if you want them to study in a public school until they graduate, you will require a larger pool of funds for college when your child turns 18. This will allow you additional time to save.
2. Analyze your assets
Your assets can include your investments, savings account, inherited estate, gifts, property, etc. It is important to know where you stand in order to understand how much more you need to save. These assets would also differ for both parents. Therefore, adding up assets from both sides can bring a more accurate picture. This will also bring in more clarity about your other goals. For instance, a retirement account such as a 401(k) account is an asset. But you must reserve it for your retirement and not use it up for another goal such as your child’s education. It helps to not intertwine accounts and goals and have separate investment instruments for specific needs.
3. Estimate inflation and the future cost of education
Just like every other commodity or service, the price of education too is bound to rise over the years. As a young parent, you would have a long journey ahead of you, which can make it hard to set the right target. Thankfully, there are many online tools and calculators that can help you determine the cost of education along with inflation in the future. This can allow you to set a realistic target for yourself.
4. Find the right investments
Once you have completed the above-mentioned steps, it is time to pick a suitable account that can help you save a sizeable corpus for your child. Here are some popular choices:
- 529 plans: This is one of the most preferred options to save for higher education. 529 plans are solely designed to facilitate savings for your child’s education-related expenses, such as books, lab equipment, computer, boarding expenditure, etc. The plan offers tax benefits in many states and lets you regularly contribute over a period of time. Grandparents can also contribute to this account from time to time.
- Coverdell education account: This is a tax-deferred account that is a lot similar to a 529 plan. You can contribute to the account and use the withdrawals to fund elementary, secondary, as well as higher education costs.
- Roth IRA: A Roth Individual Retirement Account is primarily a retirement account but can be used for some qualified expenses such as your child’s education. One of the biggest advantages of using a Roth IRA is that if your child chooses not to attend college, you can use the funds for your retirement. In the case of other accounts that are uniquely meant for education savings, the funds cannot be used for other types of expenditure without attracting a large penalty fee.
- Financial aid: Lastly, you can apply for the Free Application for Federal Student Aid or commonly known as FAFSA, if your child qualifies for financial aid. Many colleges also offer scholarships to athletes, valedictorians, etc. If you think your child can qualify for any kind of aid, you may have a lot less to worry about when it comes to saving from such a young age.
5. Be ready for all uncertainties
Life rarely goes as planned and you are likely to come across many surprises along the way. Therefore, it is crucial to be prepared for all adversities that may occur in the future. For instance, your child may not want to go to college. In this case, you may need to find alternative ways to avoid a penalty if the funds are used for unqualified expenses. Similarly, it is essential to have insurance to secure your family in case of an unfortunate situation. An adequate insurance cover can help your family cover basic expenses such as education even in your absence.
To sum it up
Every individual is different and so are their timelines. While the general rule suggests that parents should start saving at the earliest to let the power of compounding grow their money over time, the final decision would vary for everyone. It is good to communicate with your children and spouse to be on the same page. As you grow old, your income would also differ, and so would your other responsibilities. Keeping these factors in mind, along with inflation and the changing times can be instrumental in education planning.
You can also get in touch with professional financial advisors to know more about the various forms of saving and investing for your child’s future.