- Start saving the day your child is born, and save as much as possible. Compounding interest can help your savings grow more quickly. For example, putting away $25 a month beginning at your child’s birth would yield over $10,000 by age 18, assuming a 7 percent return on your money. Bump that up to $100 per month, and you would yield around $40,000 by age 18.
- Invest in a 529 plan. A 529 plan is a college savings plan sponsored by a state or educational institution. It allows you to save for your child's education expenses on a tax-advantaged basis. Contributions to a 529 plan are typically not tax-deductible, but the investment earnings grow tax-free, and withdrawals used for qualified education expenses are also tax-free.
- Save money consistently rather than on a random schedule. Consider setting up an automatic payroll deduction or have your bank automatically move money from your checking account to a college savings account. Setting a monthly amount will help the savings grow at an expected rate.
- Start a custodial account. A custodial account is a type of account set up for a minor child, with an adult serving as the custodian. The adult is responsible for managing the funds for the child until the child reaches the age of majority. Custodial accounts can be used for various purposes, including saving for a child's education or future needs.
- Establish a savings goal to measure how well you are doing, and modify that goal as your salary increases. Starting a side hustle or freelance work could bring in additional income you can save for your child's future or help adjust to the costs of having a child.
- Save windfalls such as inheritances, income tax refunds, or bonuses. Similarly, consider starting a trust, a legal arrangement in which a person or entity transfers ownership to another person or entity to hold and manage for the benefit of a third party. Setting up a trust for your child can allow you to manage and distribute assets to your child in a financially responsible way.
- Increase the amount you save by 5 percent each year to keep up with the college tuition inflation rate.
- Ask relatives to contribute to the savings account instead of giving gifts. Instead of having a basket full of unused toys, your children could have a significant amount of money to use to help them through college.
- Teach your children about saving by getting them involved in the financial preparation for their education. You can help your child set goals, make a budget, and learn about the importance of saving and investing for the long term. Encouraging your child to save and invest their own money can help them develop good financial habits and prepare for their future.
- Make sure to pay off your credit cards, maintain a reserve of six months' pay in case of an emergency, and save for retirement to be financially cushioned. This helps protect you and your children from having to dip into college savings to cover other expenses.
Saving for your child's future takes time and effort, but giving them a strong financial foundation is worth it. By starting early and utilizing these strategies, you can help ensure that your child has the resources they need to achieve their goals.
This blog was initially posted in 2017 but was rewritten in 2023.