How To Save Money So Baby Can Go To College. Yes, College.

It’s been raining babies at Carousel Designs and we’re lucky enough to have a couple more new little people making their big appearance this spring.  So needless to say, “preparing for baby” has been a big topic of conversation around here.

And given that we’re in the “preparing for baby” business, we have a lot (I mean…a lot) of fun at work.  But our conversations not only cover preparing the nursery for baby, but getting ready in other ways as well…such as the necessary financial preparations for the day when baby decides he or she wants to go to college!

One particular pregnant member of the Carousel Designs family is a financial guru so I talked her into writing a blog post for us with some advice when it comes to saving money for college.

Now some of you might be thinking, “College?  That’s like, 18 years away!”

My answer: “Yes, but it’ll be the quickest 18 years you’ve ever experienced!”

* * *

Fresh out of college, I worked for an investment firm where a large part of my day was spent running “hypotheticals” to show clients how they could grow their money over time.  Needless to say, being young and single, I didn’t take my own advice about the importance of being responsible and planning for the future and instead pushed the information as far back in my mind as I possibly could.

Then I got pregnant.

When my husband and I learned that we were expecting our first child, I felt a sudden urgency to set up a savings account.  I kept thinking of a hypothetical growth chart with an 18-year span and before I knew it, I was morphing into that responsible parent I knew that I could be.

In between picking out a name (something smart and conservative), decorating the nursery (how I stumbled upon Carousel Designs) and considering organic foods (berries & grapes are a biggie), I researched ways we could start saving for our baby’s future.

No doubt it was tempting to put off the investing part (everything else we needed seemed a lot more pressing), but with a few easy steps, I was able to get the ball rolling without straining our current finances.

Though there are many ways to save for college, here are 3 good programs you may want to consider:

  1. 529 college savings plan:  This savings plan is an investment account where the earnings grow tax deferred and the qualified distributions are federal and income tax free.  The qualified distributions can be used for your child’s tuition, books, etc at most colleges and universities.  A 529 can be set up for as low as a $50 minimum deposit or $15 dollars a month.  We set ours up through our Fidelity Rewards American Express and the “points” earned using our credit card now go toward the plan, instead of towards our frequent flier miles (which we are finding harder to use with little ones anyway).
  2. Coverdell Education Savings Account: This plan allows you to invest $2000 per year in an educational investment account without being taxed on earnings from interest, dividends and appreciation (as long as the child uses the funds before age 30 for qualified educational expenses).  Investing $2000 a year for 18 years would amount to $36,000, but at 12% growth…you could have $126, 000 saved for your child’s college expenses.
  3. Uniform Transfer/Gifts to Minor Act (UGMA):  The custodian (usually a parent or grandparent) manages this savings account until the child reaches a certain age (18 or 21) depending on the UGMA state law.  This plan allows the custodian to give so many thousands of dollars to another person while taking advantage of the child’s lower tax rate.  To be honest, I never considered this plan, as I was always under the impression that people with a lot of extra money benefited most from these accounts.

Those are just 3 tax favored plan options that are set up to help you save for college.  Though I can’t advise you on what would work best in your situation, a brief chat with a financial advisor or CPA can help you consider your specific needs and circumstances.

I CAN tell you that you don’t have to be a wall street guru to set one up, and doing so early will make it easy to invest any cash gifts you may receive from generous relatives, rather than seeing the money disappear on a diaper run to Costco (even though it takes a small fortune to keep this family properly diapered up!).