Saving for Your Child’s Education the Right Way

When saving for children’s education, where you put your money is just as important as how much you put away each month. According to Greg Prescott, an expert on saving for education, “given the large sum that you have to raise in 18 years or less, you have to invest your savings in things that will earn you a high rate of return with as little risk as possible”.

As your savings balloon over time, you must know how to best protect that capital. You want to be sure that the funds are there when the time comes to pay the tuition bills.

Some common mistakes are putting the money in the child’s name or a custodial account. Both are too risky. Putting the money in the child’s hands means the child owns and controls the money immediately with a custodial account. From age 14 on, he/she can petition the court for an accounting on the use of the money. At age 18, the child gets full access to the lump sum.

It’s also too risky to keep a college fund in the parents’ names. Creditors can go after the money, and, in the case of a divorce, the money may be subject to equitable distribution.

A better way is setting up a trust in the child’s name with a parent as co-trustee. It costs about $1,000. When this trust is properly structured, only the IRS will be able to sue for the money.

Meanwhile, trustees can use the money for the health, education and care of the child. And the assets can be distributed to the child in sen­sible increments so he can learn how to handle the money.

Another mistake is waiting until the child is a few years old to start saving. The sooner you begin sav­ing, the more opportunity the money will have to grow. Instead begin an investment program when the child is born and contribute to it on a monthly basis.

Don’t avoid the stock market, equi­ties are the one long-term investment that can defy the ravages of inflation. But the stock market is volatile, so you may want to consider selling part of that stock portfolio and taking profits as your child enters his mid-teens. This will protect what you’ve made from any sudden drops in the market as your child nears college age.

If you’re unfamiliar with investing and don’t have a trusted expert to guide you at the time, you can put the money into very conservative products, such as Certificates of Deposits or money-market funds. Then you’ll have at least some money saved.

An additional mistake is not being well-diversified. If you own only a few stocks or bonds, the portfolio can be devastated if just one or two of your holdings hit the skids. A better idea is to consider buying mutual funds of both stocks and bonds.

Source: Keys to investing for your child’s future by Martin M. Shenkman

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