Whether you’re planning for your own higher education journey or your child’s, starting a college fund early is a great idea. The average American parent, according to college saving statistics published by Education Data Initiative, wants to save more than $55,000 for their child’s college.
While that may seem like a hefty number, with the many different ways to save for college, it can be possible. Saving for college and higher education years before school starts can help reduce costs in the long run and help ease the anxiety of paying for an education. Let’s get into how to start a college fund with a few different options.
1. Savings Account
Traditional savings accounts are a popular way to save money that can be easily accessed at any time. Most banks and credit unions offer savings account options, and it’s estimated that 57% of Americans keep some of their funds in a savings account.
Savings accounts rarely pay much interest (or high enough interest) that allows the funds in a savings account to grow outside of what is put in them. The national average savings rate is 0.47%, according to the FDIC.
Essentially, the money put into a traditional savings account is the money put in — there is little or no growth from compound interest. For example, if you wanted to save $55,000 for your child’s college fund, you would need to put $300 a month into a savings account for more than 15 years. As inflation grows, the dollars in a savings account don’t keep up; their value is the same.
A savings account can be a great choice to save education funds that are needed quickly. Weigh the pros and cons to see what works best for you and your financial situation.
2. 529 Plan
When looking at how to start a college fund and where to start a college fund, a 529 account is a good place to look.
A 529 plan is one of the best ways to save for college. In North Carolina, earnings on NC 529 Plan accounts are free from both federal and state taxes when the money is used for qualified education expenses.
529 plans are investment savings Accounts, so the contributions made to an NC 529 Account are invested into stocks, bonds, and short-term reserves. There are different portfolio options that can be tailored to your risk preference and your beneficiary’s anticipated college enrollment. This allows for funds to potentially grow with inflation and rising costs.
While 529 funds can only be used (tax-free) for qualified education expenses, they cover a host of options to help educate beneficiaries. There are different types of 529 Plans; education savings plans and prepaid tuition plans. The NC 529 Plan is the college savings program for North Carolina. NC 529 Accounts can be used to help fund:
- K-12 tuition
- College expenses (including tuition, books, room and board, a computer and more)
- Career and technical education
- Apprenticeship programs
- Special needs equipment
- Student loan payments
If there is money left over in an account for a beneficiary, that money can be rolled over for another beneficiary or rolled over into a Roth IRA for the original beneficiary. Not only can an NC 529 Account help save for education, but it can also help save for retirement and set up a generational wealth transfer. As always, invest in what’s best for you and your financial situation.
3. Traditional Stocks and Brokerage Accounts
Making your money work for you by investing in stocks or a brokerage account is another way to save money and earmark it for your child’s education. These types of investment accounts allow you to invest and hopefully grow your money through stocks, bonds, mutual funds, and other financial instruments. As with any investment, there is some risk. You could lose money, but you also have the potential to earn higher returns over the long run.
This is similar to how NC 529 Plan investment options work, but there are a few differences. A general stock account has no limit on contributions or conditions on spending. However, you will have to pay taxes on your gains. This can reduce the amount of money saved for education. As we’ve mentioned, NC 529 funds grow tax-free as long as the money is used for qualified education expenses.
Choose Your Account and Start Saving
When you’re looking at how to start a college fund, it’s important to figure out how much money you may need to set aside. The NC 529 College Savings Calculator can help you understand how much you want to save to meet your goals. Many financial experts recommend saving for college when children are young, and when they’re ready for school to utilize grants, scholarships, and other financial aid to help cover college costs.
If you’re ready to save for college, but don’t know where to start, we’re here to help. We have a library of resources to get you started and help you understand the ins and outs of your new account. Open an NC 529 Account today and save for the costs of college tomorrow.
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