When to Start Saving Money For College

Having a baby is expensive. There’s the delivery, diapers, food, and clothes—the list of things to buy can feel endless. With the constant demands of being a parent, it’s hard to look past the moment you’re in. And with inflation the highest it’s been in years and a pandemic still raging, it’s even harder to think about saving for something as far away as college when you’re just trying to get through the day.

But by taking small steps now—including writing your will, which we recommend every parent do—you can help to secure a more stable future for your child, something that feels especially important in a time of economic uncertainty.

Budget for saving—even just a little

Before you start investing or saving your money, you should take a hard look at your finances. There are numerous resources and support communities out there to help you declutter your finances, from Reddit communities to mobile apps that can get you started.

The best way to start is to go back and look at your past three or so months of expenses. Categorize them, and find the areas where you’re spending a lot. It’s easy to identify ones like a daily trip to Starbucks, which can save you hundreds if you cut it out. But you also need to come up with a plan on how to handle those spending areas. To keep with Starbucks as an example, are you going to set a monthly budget, limit your trips, or cut it out entirely? The best way to make lasting change is to make the change easy and suited to your lifestyle. If you’re going to cut out Starbucks entirely, you’re going to need something to replace your daily latte, like an at-home coffee machine with a frothing wand.

These changes aren’t always a quick fix, and sometimes you won’t be able to find as much wiggle room as you were hoping. But look for things like subscription services, consumables, and shopping sprees. If you were to limit or cut those out, how much could you be saving?

Open a savings account

According to US News the average in-state tuition and fees at public universities has increased 211% in the past 20 years, and the average American graduate carries $30k in debt. It’s becoming less and less likely to graduate from college debt-free.

One of the ways to lessen your child’s debt is to open a savings account they can tap into when they’re enrolled in college. Here are some of your options and a brief overview of how they work:

529 College Savings Plan: The 529 Plan stands out as one of the best investments because of its tax advantages. Contributions are made with after-tax dollars, and withdrawals are tax-free as long as they pay for qualified higher education expenses. And in some states, there’s a tax deduction or credit based on your contributions.

529 Prepaid Tuition Plan: In order to try to sidestep inflation, you can also open a prepaid tuition account which allows you to “lock in” the tuition of that year. This program is solely to cover tuition costs and restricts your child to attending college in-state, although the amount you’ve invested can be returned to you if they decide to go out of state—you’ll just lose the growth.

Coverdell Education Savings Account: The Coverdell ESA works a lot like a 529, allowing you to grow and withdraw your funds tax-free (as long as they’re used for qualifying expenses). Additionally, these plans can be used for K-12 as well as higher education, which may be more beneficial for some parents. However, these ESAs must be established through a financial institution or brokerage, and there are no tax benefits to your contributions when filing.

Custodial Accounts: As a trustee, you can put money or assets into Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts. These accounts are less college-based, and the child will get full access to the account when they reach the legal age set by your state (somewhere between 18 to 21 years). There are no limits to contributions, but large enough sums will mean you’re subject to the gift tax.

Make your savings automatic

Once you have your plan established and your contribution amount figured out, the next step to creating substantial savings accounts is to make your savings automatic. By sending a monthly transfer to the account, you can make it a regular part of your budget and give your funds time to grow.

If your financial situation changes—such as a raise or a job loss—you can always edit these amounts. But consistent contributions that start when your child is young will help you steadily build up funds to help pay for your child’s education along with financial aid, scholarships, grants and loans.