Saving Money For College
Your children may still be in diapers, but it's never too soon‒or too late‒to start thinking about saving money for their college education. With tuition costs increasing every year, it's hard to predict what education costs will be by the time your children graduate high school.
However, there are several ways you can begin investment strategies you can follow now to help you prepare for the future. If you start making small investments now while your children are still young, that's less money you'll have to find as they prepare to leave for college.
Savings accounts and CDs.
Parents traditionally start saving money for their children in a savings account, but the interest in those accounts doesn't add up and help your money grow. Plus, because those accounts are easily accessible, it can be tempting to withdraw money early and spend it on non-education related items.
If you are interested in trying something new but want an option that is low-risk, consider a certificate of deposit. CDs are another way to save money for the short-term, as most CDs are purchased for between one and five years. While they earn more interest than a traditional savings account, interest rates hover around five percent, which doesn't add up quickly over the long run. Plus, if you were to withdraw the money early, the penalties may outweigh the interest earned and even cut into the initial deposit.
Stocks, bonds and mutual funds.
Stocks and bonds may be appealing if you're willing to take some risks with your investments.
Bonds are considered less risky than stocks because if a company goes bankrupt bonds get paid off first. Bonds promise to pay you the bond amount plus interest at a point in the future - anywhere from a few months to years.
If you buy stock in a company and the company you invest in fails, you could lose the money you invested. But if it succeeds, you could be rewarded with dividends and could ultimately sell the stock at a profit.
Parents also are considering mutual funds as a way to invest for the future. Mutual funds have different degrees of risk associated with them. There are also fees involved and you have to pay taxes on them. However, mutual funds are popular and are professionally managed. The manager creates a mixture of stocks and bonds, and decides when to buy and sell.
State-sponsored savings plans.
Some states are now offering tuition programs that allow them to start paying on their child's education long before that child is ready for college. Those programs allow parents to put money into a state-run investment program. However, each program has a different degree of flexibility, so it's important to shop around before deciding on this option.
Education Individual Retirement Accounts.
Education IRAs allow you to start saving a small amount of money early and consistently. Up to $500 can be contributed each year, after taxes, for every child under age 18.
The accounts are convenient because they can be set up through virtually any bank and the funds can be withdrawn for education-related expenses, like tuition, room and board or supplies. The money is not taxed if it's used for education-related expenses.
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