Planning for Their Future: How to Save for Your Child’s Education
Whether you have little ones or a highschooler on the rise, everyone wants to see their children go on to pursue some form of higher education. However, the financial aspect of college can be tough to plan and save for, especially if you don’t start early. Luckily, there are many different ways to earn extra income and budget so you can send your loved one to a great school. Common ways to save for your child’s education include:
- Using a 529 plan
- Following the 2K rule
- Using a Coverdell education savings account
- Encouraging AP and dual credit classes
Using a 529 Plan
A 529 plan is a government sponsored savings plan that encourages saving for future education costs. Usually, these plans are tax-friendly — many states will actually let you deduct your contributions from your state income tax. When you withdraw the money to use for college or another form of higher education, the money will not be taxed.
Following the 2K Rule
Following the 2K rule is also a great way to help budget for future college expenses. This rule suggests that you should multiply your child’s age by $2,000 to create an ideal college savings target. So, if your child is 3, you should try to have $6,000 saved. If you save $2,000 each year, they could have up to $36,000 by the time they’re 18 and ready to go to college. Some accredited universities that your child could attend for roughly $36,000 over 4 years include:
- University of Memphis
- Arkansas State
- University of Tennessee at Martin
- Tennessee Tech University
- University of Tennessee at Chattanooga
Using a Coverdell Education Savings Account
Coverdell education savings accounts are tax-deferred trust accounts that can be used to pay for higher education expenses. The earnings from this account accumulate tax-free, and the distributions are free of income tax — as long as the funds are used for education. Be sure to use the funds in this kind of account before age 30, or there could be tax penalties.
While this option may seem like the most obvious, many people don’t think about using the income they earn from their investments to fund their child’s education. Investing is a great way to earn passive income that you can tuck away into a savings account for future college expenses. Some investing options to earn extra income include:
- Real estate (rental properties)
- Dividend stocks
- Index funds
- Peer-to-peer lending
Encouraging AP and Dual Credit Classes
Another great way to help reduce college expenses is to encourage your child to take AP (advanced placement) and dual credit classes. These allow your student to take college-level classes in high school, and receive college credit for them. This means your child can “test out” of several prerequisites and possibly graduate early.
Carty & Company Can Help You Save
Carty & Company is here to help clients who want to control their financial destination and decisions, but want an experienced and knowledgeable right hand person’s guidance. If you’re interested in learning more about or need assistance with investments, budgeting, or other financial matters, contact us today!
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