How to Save Money for Your Child’s College

*This post has been reviewed by an Illinois Registered CPA. However, when making important financial decisions, it's best to speak with your financial advisor.

Last Updated on February 20, 2025

Learn How to Save Money for Your Child’s College

Raising kids is no easy task these days, especially if you focus on their education. Everything costs a lot, from school trips to extracurricular activities. Even when they are babies, there are a lot of costs, including diapers. More expenses pop up as graduation approaches when you start wondering how to pay for your child’s education.

Tuition fees can be thousands of dollars per year, and the earlier you start saving money for college, the better. Learn how to budget to save money for your child’s college and see where you can make adjustments to reduce expenses. When you plan on sending your kids to college, every dollar matters.

How to Save Money for Your Child with a Custodial Account

A custodial account is one of the best ways to save money for kids. Like any other savings plan, it needs commitment. If you set up one of these accounts, do your best to contribute regularly. A custodial account has a beneficiary. In your case, your child.

The beneficiary is usually a minor who cannot manage or access the account until they become of legal age. The account also has a custodian. This is the person who has the right to manage the account. In this case, it will be you, the parent.

There are also cases when a different person can create the account. For example, a grandparent. Then, a parent can step in and become the custodian if necessary. These accounts work toward the beneficiary’s interest. Each contribution is like a gift for the minor beneficiary. When they reach the age of majority, kids can use these funds for college fees or other purposes.

Through these accounts, the beneficiary can also possess other assets. They can own securities, for example. When they become of legal age, beneficiaries get access to the funds in the account. They also have the right to use them as they please.

Opening an Education Savings Account

These are special savings accounts for education. They are also known as Coverdell Education Savings accounts or ESAs. These savings accounts work similarly nationwide. There are several advantages to opening an ESA savings account:

• They work for any form of education from kindergarten to grad school
• They are tax-advantaged
• You can use the earnings for any qualifying education costs

These accounts have a contribution limit of $2,000 per year per child. You can contribute to multiple ESAs at the same time. The funds are meant for educational purposes and the beneficiary must use them as such. There is also an age limit. They must access the funds for education costs before turning 30. Penalties apply if the beneficiary uses the funds afterward.

Saving Money for Your Child’s College in a Trust Fund

Another method to save money for your child’s college tuition fees is a trust fund. These funds are similar to custodial accounts. They allow parents to contribute monthly to their kids’ savings, but there is a major difference you might like.

With these funds, you can impose certain limitations. You can choose when you allow your child to access the money. What’s even more important is that you can choose the purpose. Trust funds are flexible. If you want to limit their usage to college tuition fees, you can do it. You can also choose another purpose, such as a down payment for a home.

This method might seem a bit drastic, but it isn’t. You’ll work hard to put aside all that money. It’s normal to want your kid to use it wisely. Also, you might start contributing early. It is impossible to predict how your child will develop.

What will they want to achieve after school? Going to college might be your dream, but not theirs. You may not want them to spend the money in the trust fund on exotic vacations, which is why this option is a good choice. It allows you to have some degree of control even after the beneficiary has access to the money.

Another aspect that differentiates trust funds from regular savings accounts is their worth. Usually, you wouldn’t open the account for only a few hundred dollars. People who use trust funds typically have significant amounts in them. You need a lawyer to set up the account. This is enough to understand you need more cash for a trust fund.

How to Save Money with a Regular Savings Account

A trust fund or a custodial account might seem too complicated. You might want to choose the easiest option, a regular savings account. You don’t even need to drive to the bank because you can create a savings account online within minutes.

If you already have a debit account at one bank and internet banking access, you can set up the account with a few clicks. If you open an account at a new bank, you need to register and provide some personal information.

Either option is fast and practical. Before you open an account, do some research. You want one that offers benefits. Here are a few aspects to check out:

• The bank’s interest rate
• Monthly account management fees
• Withdrawal fees
• Any other bank commissions
• Withdrawal terms

The point is to create an account that will benefit you in the long term, such as earning more money with interest. You might also get additional benefits upon opening the account. Some banks offer bonuses for referrals, for example.

As your child grows, you might want to change the account type. You could create one where they become joint owner. They could have access to the money. At the same time, you would monitor their activity. This would be a great way to teach them more about responsible spending.

Opening a 529 Plan to Put Money Aside for Kids’ College

These plans are another popular option for parents who save money for kids. They are specially designed for education fees, and state governments sponsor them. Among the benefits of these plans, you can find tax-friendliness. If you contribute to a 529 plan, you might be able to deduct a percentage of your income tax. This possibility depends on the state where you live.

Another advantage is that these accounts are tax-free upon withdrawals. You should research before setting up a plan. The rules for each plan differ on a state-by-state basis.

The good news is that there are no residency restrictions. You could be based in a state and open a 529 plan in a different one. These plans are also flexible. You don’t have to transfer hundreds of dollars per month to these accounts. You can open them with as little as $25.

Using a Health Savings Account for Tuition Fees

This is another option you might want to consider. A health savings account has a different purpose – covering health-related expenses. It is available for those who have high deductible health insurance plans. Although these are health care plans, you can use them for other purposes too, but you need to wait for a while before you can tap into the funds.

You are able to access the money at any time for medical-related costs. You can use the money for yourself, as the beneficiary, or for your child. When you turn 65, you are free to access the money for any other reason. If you withdraw money afterward, you will incur taxes.

The advantage of these plans is that they are tax-free and tax-deductible. If turning 65 coincides with the moment your kids go to college; this plan can help you. If your kids go to college earlier, you can still use the money. You can withdraw it after they graduate. Then, you can pay off their student loan with this money.

Investing in Different Assets

How can you save money for your child’s college? Another way to put money aside is by investing. You might not have a large initial amount to start with, but the sooner you start, the less you need. Your money can produce more money in time.

It is hard to choose an investment type. You need to study the main options. Understand the differences between them. An asset that promises a high return, like stocks, is tempting, but make sure you understand the risks. Usually, the higher the return, the higher the risk. That is because some assets (e.g., cryptocurrencies) are more volatile than others.

Bonds and certificates of deposit are other options. Treasury Inflation-Protected Securities and money market accounts are also stable alternatives. Real estate is a good example if you want to choose a more practical avenue. It is more stable than many other assets. No matter what you opt for, make a documented choice. Research and ponder well before you invest money. Over the years, the results can be quite satisfactory.

The Best Budgeting Strategies to Save Money for Kids’ College Fees

Many people ask themselves why they can’t save money, but they fail to think about their financial mistakes. In most cases, poor budgeting is the cause of an empty savings account. Saving money is not easy if you don’t budget with care. In its essence, budgeting involves three steps

1. Write down your income
2. Write down your recurrent expenses
3. Assign a strict amount to each recurrent spending

Here are two popular budgeting strategies to help you save money for your child’s college.

The 50-30-20 budget strategy

With this strategy, you put money into a savings account each month. The ideal share is 20% of your budget. The rest of your money is divided into necessities (50%) and wants (30%).

Let’s see what you can achieve with this strategy if both you and your spouse save money monthly.

Savings percentage for college	20%
Your salary	$3,500 per month	$700
Your spouse’s salary	$3,300 per month	$660
Money saved per month	$1,360
Money saved per year	$16,320

From two incomes of $3,500 and $3,300, you can save $1,360 per month (20% of your combined income) and $16,320 per year.

The digital envelopes budgeting method

Are you wondering how to save money for your child or for any other purpose? This method can answer your question. The digital envelopes method is a flexible budgeting strategy. It allows you to divide your budget as you please.

For each spending category, you will create an envelope. In the digital sphere, this means a separate area. Then, assign a specific fund to each spending type and transfer it to its envelope. Every month, only spend the allocated budget.

Frequently Asked Questions FAQs

How much should I save for my kid’s college?

It is hard to answer this question. The answer depends on tuition fees. These depend on the university and study program. Note that a year of college tuition for a public college, for out-of-state students can cost around $27,560 on average. To this cost, also add the living expenses, in case your kid needs to move to a different city. Maybe you want to budget for this expense by following these steps:

1. Determine the amount you need (tuition & living expenses).
2. Calculate how much you can save monthly for this expense.
3. Save that amount in a separate account to avoid using it.

How to save money for my child’s college fast?

To save money faster, you should budget. The digital envelopes strategy is a good solution. This method helps you achieve your savings purpose quickly. It can also help you fix your credit faster. It promotes spending a limited amount on all your necessities. As a result, you put more money aside for college fees. You can also use the half-payment method to pay bills and put money aside for college.

How soon should I start saving money for my kid’s college?

The sooner you start, the better. That way you have time to put aside more money. If you open a savings account, you will also earn interest. This will add more money to your college fund.

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