Raul Harman
It is a high wire act deciding between financially enabling your kids to get education and teaching them to earn the money on their own (and spend it on education or other, following). Still, the morality behind the mentioned dilemma is not really something you should educate yourself on a blog or along the way – this is a matter of personal (parenthood) conviction, parenting method and the end result you are trying to achieve.
Notwithstanding, we will be brainstorming through options that will jolt you in the direction of building a healthy saving system and plan your investments ahead.
Image Credit: Pixa Bay
Rely on the 529 plan
A 529 plan is a perfect savings option as it has no income restrictions and is commonly offering tax deductions on contributions. Families with higher annual income are in a great investment position with the 529 plan as they can invest larger chunks of money into their child’s education and watch the account reap greater returns. What’s additionally great is that custodial fees usually range between 0.25% or 0.3% which is, in today’s climate, pretty low.
Often, the 529 plan is sponsored by the state or a single educational institution, with contributions being placed in investments such as ETFs and stocks that can grow over time, tax-deferred.
One downside of the 529 plan is that its uses are limited, i.e. the money saved on this plan is strictly limited to education expenses. Meaning, if it happens you need the money saved up for something other than your kid’s college tuitions and need to withdraw all the money, there will be hefty charges.
The added limitation of the 529 plan is that it offers a limited menu of investment options, like an employer-sponsored 401(k). Although these alternatives may be perfectly feasible, you may be unable to shape the portfolio precisely as you’d like to.
Another tax-advantaged investment account plan similar to 529 is The Coverdell Education Savings Account. The account grows tax-deferred and the money can typically be withdrawn tax-free or transferred to another kid’s account. The plan opens a broad array of bonds, stocks and ETFs and it is definitely worth taking a look into.
Do it through real-estate investment
While real-estate investing seems like a long stretch, there is a very sound bottom line to the whole plan. Having a piece of property is a sure money income on monthly basis (if rented), so there is no insecurity about whether or not you’ll get an extra chunk of cash to rely on.
Here’s the basic version of a real estate college savings plan:
- Invest in a rental property in a solid location that can cover all expenses
- Make a down payment
- Acquire self-amortizing, long-term debt with fixed interes
- Apply excess rental cash flow to speed up debt pay down
- Harvest the equity with a sale or a refinance at the moment you need the saved up money for college
With this real-estate plan, the use of safe leverage (debt) against a solid rental property is simple. Just make sure to do financial planning first. Australian Lending Centre has a budget planning calculator on their website which can help you organize your money more wisely. Naturally, you’ll include legal advice into the mix so if anything is to happen (any type of crisis regarding the property, debt, fees, etc.) you turn to litigation support services that get to the bottom of the problem and present you with the best end-solution.
Old-fashioned savings: The under-the-mattress option
Before you burst into laughter with this option, think about it – this is a very sound and viable option that worked for decades before there was any other savings plan fashioned. Regardless of the type of savings plan you opt for, the under-the-mattress savings option should make for at least a portion of your overall tuition savings. Why is it good? First, you can withdraw (take) the money at any moment, tax-free. You won’t be paying fees if you take the money before your kid’s college starts and you can use the money for any purpose. However, this type of savings plan advises small cash allocation given the rising cost of tuition and inflation.
In the world of today, any form of financial support helps. So, setting some money aside to stimulate your child towards intellectual climb may not be the worst thing you can do.
