Family life can be pretty expensive. From diapers to college, you can expect to dish a good amount of cash throughout your children’s lives. The reality is, when it comes to your kids, some kind of financial planning goes into every decision you make for them. It’s not an easy task to tackle with the everyday stressors of life, but the earlier you plan for your child’s future, the more time you’ll have to focus on enjoying the many stages of parenting. Here are a few tips on how you can invest towards a bright education.
It is absolutely smart to start investing for your child’s college education early on. Without a savings plan, college expenses can hit like a torrential downpour. The sooner you start saving for this point in time, the easier it will be for your family to make decisions when it comes to choosing the right school.
Not all investment vehicles are the same, however. Choosing the wrong one, can actually cost your children. Before you get started, estimate tuition expenses using this college planner calculator.
529 Savings Plans
A 529 savings plan, is one of the most common plans available when it comes to saving for college. You can choose from two types of programs — a savings plan, or a prepaid tuition plan. Depending on the state, benefits will vary, but both plans accrue tax-free earnings that can be later withdrawn for educational expenses at eligible universities, colleges and even vocational and trade schools. Some state plans even offer gift tax incentives for contributors, allowing you, along with any other relatives and friends, to contribute to the program anywhere in the US. It’s a great option for those who start investing early in hopes of locking in tuition costs. However, keep in mind that 529 plans are usually based on the performance of mutual funds, making them subject to market risk.
With more time on your hands, you can actually consider a customized investment strategy that changes as your child grows — including stocks. This may help you multiply your savings at a faster rate than a 529 savings, or prepaid tuition plan, but just make sure you weigh the pros and cons. Investing in stocks for your child’s college education, can be a risky move if not managed properly. If your kid is young, you may have time to make up losses, but the closer they are to high school graduation, the riskier the strategy becomes. Universities won’t take stock market losses as an excuse to defer tuition.
Another customized strategy would be to invest in a high yield investment option, such as a limited partnership (LP) in real estate, offered by Jakob Pek Fund. Although all investments carry some level of risk, an LP can be an alternative route — actually helping parents invest for college at a much faster rate than traditional methods. For example, let’s imagine your child is 8 years old and you have saved up $10,000 for their college education. By investing this amount of $10,000 in a real estate LP, at a 5.5%, with an additional annual contribution of $1,000 per year, for 10 years, you’ll be able to cash out $30,664.94 by the time your child is 18 years old.
Realistically, every family should evaluate what the best option is, given their financial situation and longterm objectives. Some parents may be looking for tax benefits, while others look for a fast track to college savings. Whatever the case might be, understanding that there are other options besides savings accounts, is an important first step.