Best way to save for your children's education, on a budget ?

Question

I have three children... I am not rich. I didn't have any money in the past to try and save, and now that I get child support, I actually want it to go to my children's future. I can tuck away around 25 dollars a month per child... but what should I do with it? Put it in a savings account, buy bonds, invest? I have no clue (I was always bad with my own money). I have 12 years til they start going to college, if they don't graduate early. So I need to figure this out pretty quickly, lol.

Answer 1

Before you plan on what to do with the money, plan to save as much as possible, mainly by avoiding as much taxes as possible.

- Coverdell Education Savings Account
- 529 Plan

A Coverdell Education Savings Account (also known as an Education Savings Account, a Coverdell ESA, a Coverdell Account, or just an ESA and formerly known as an Education IRA), is a tax-advantaged investment account in the United States designed to encourage savings to cover future college education expenses. It is found at section 530 of the Internal Revenue Code (26 U.S.C. § 530).

The tax treatment of Coverdell ESAs are much the same as 529 plans with a few important differences. Like a 529 plan, Coverdell ESAs allow money to grow tax deferred and proceeds to be withdrawn tax free for qualified education expenses at a qualified institution. However the definition of qualified expenses in an ESA includes primary and secondary school, not just college and university.

- Important differences with 529 plans

Coverdell ESAs have lower contribution limits; currently $2,000 can be contributed per year per child, while 529 plans generally have no restrictions on contributions. (Gift tax rules apply)
Coverdell ESAs can allow almost any investment inside including stocks, bonds, and mutual funds, while 529 plans only allow a choice among a number of state run allocation programs. The rules for investments allowed in ESAs are the same as those for IRAs.
Balances in a Coverdell ESA must be disbursed on qualified education expenses by the time the beneficiary is 30 years old or gifted to another family member below the age of 30 in order to avoid taxes and penalties; there is no age limit for 529 plans.
Coverdell ESAs allow withdrawing the money tax free for qualified elementary and secondary school expenses; 529 plans do not.
The income level of a donor may affect contributions into a Coverdell ESA, but would not affect contributions to a Section 529 plan.

- Important similarities with 529 plans

Money in both a Coverdell ESA and a 529 plan is not considered the child's (beneficiary's) money when applying for federal financial aid as long as the owner of the account is someone other than the beneficiary, such as a parent. This works to increase the child's potential financial aid because parents are expected to contribute only around 6% of their assets to finance college education, as opposed to the child's 35%.
The custodian of both an ESA and a 529 plan can designate a new beneficiary without incurring taxes or penalties provided that the new beneficiary is an eligible family member of the previous beneficiary.

A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. It is named after section 529 of the Internal Revenue Code.

- Advantages

All money grows federal and state income-tax free
The account holder retains control of the assets within the program regardless of beneficiary's age
The beneficiary can be changed at any time to another member of the beneficiary's family
Many states exempt withdrawals from state income-tax for qualified higher education expenses
Money can be used virtually everywhere — over 8,000 schools in the U.S. and over 800 foreign schools
Money can be used to pay for tuition, fees, room, board, books, supplies and required equipment
High maximum contribution limits
Account owners can make a lump sum contribution of up to $60,000 per beneficiary or $120,000 if married filing jointly and avoid incurring a taxable gift on this amount by electing to use five years of the annual gift tax exclusion all in one year. After using this provision, the annual exclusion cannot be used again for the same beneficiary until the five-year period has passed. Should a donor die within those five years, a pro-rata amount of the gift will revert back to their estate and be treated as a taxable gift
Assets within 529 plans are protected from bankruptcy
Most plans have very low minimum monthly contribution limits making them attractive to all families regardless of income level
Each state offers a no-fee, low cost option that can be opened by contacting the plan directly

REMEMBER!

- It's never to early or late to start saving for education.
- Even $25 each month can make a difference.

WHAT TO DO WITH THE MONEY:

For the first couple of months, you might just want to save them and collect interest. Try finding a bank that will offer you a high interest rate. I think some banks offer rates as high as 5.25% EAR/APY.

- In 1-year, with $25 a month, 5.25% APY, you will have ($307.13)
- In 2-years, you will have, ($630.33)
- In 3-years, you will have, ($970.45)
- In 4-years, you will start to invest. In after just two months, you will have over $1000 in the account. You can afford to purchase a Bond, or open a small CD. You can even invest in a High Yield mutual fund. The point is that your rate-or-return will increase, to around 8% annually (conservative estimate). In the end of this year, you should have, ($1,355.22)
- Finally, at the end of 12-years, you will have, ($5,818.12)

Now, it's important to note, that as time goes on, your rate-of-return actually increases at an increasing rate because of the effect of compounding interest! I would recommend that when your children need to go to school, they find a way to pay for their expenses through subsidized student loans and federal aid, as much as possible. Even if they have to take out some private student loans during this time, it will not be too bad. This is why.

Imagine that your children take on loans during this time, and some of thier education bill is even cut down due to help from financial aid. This is what your account will look like in 4 more years.

- In year-16 when your child is done from college, the balance in the account will have reached a total of, ($9324.24)! At this time, you can help your child pay a significant portion of their student loan(s).

The national average for debt after graduation from an undergraduate degree program is ($10,734), according to 2006 survey data of the BLS.

If this number seems too small, consider several things. An 8% estimate is a conservative estimate, and high yield mutual funds can actually return more. Children are very expensive in the early stages of life. As your children will get older, their expenses will decline dramatically (less child-care, baby expenses, medical bills). This will allow you to save more money into the account each month. As time goes on, your job may actually pay you more, and you might find other forms of help on the way. This will give you the financial flexibability to put even more into the account each month. Lastly, each tax-advantage plan allows not only you, but relatives, and even friends to put money in the account! It's not a bad idea to ask relatives to make contributions to your children's college fund instead of getting them something else as a birthday gift. All those birthday gifts from all those friends and relatives will quickly add up over the 12 or 16 year period!

I hope this was more informative that confusing. If you have any more questions, please send me an e-mail. I'll be more than happy to answer any more questions for your children's future.

Answer 2

Check your state. My mom invested in the Virginia College Savings Plan. As long as I went to an instate school it was a good deal and if not, we still got the money to put towards another school. The benefit of the Savings Plans is that I think the interest is not taxed since it is for education. You also lock in current tuition or something like that. It is easy to do. Savings bonds take a long time to mature. You should look into the interest rates of what I mentioned and the length of time before you would need to cash the bonds. You can calculate/ask bank how much they will be worth at the time you will be cashing them. With the bonds, I would collect them until you have the minimum of 10,000 and then deposit them in a high market money account when interest rates are good. I would also combine buying bonds with CDs and other bank offerings when interest rates are high or just do that instead of a high market money account.

The best thing for your situation besides your State's Education Savings Plan would be to speak to a financial advisor at your bank on how to make the most of your money and what interest rates are high now.

Answer 3

Well you could open an Utma account. Its an account where you open a joint account, so to speak, with the child. One account for each child. Its a savings account where the child owns it but can't touch it till 21, when its closed and reopened in the childs name. You are the only one that has access to it.
If after a couple of years there is enough money and you still have a few years before they turn 18-21 and want to save more for there education, then take that savings and talk;k to the banks investment rep about a 529 savings account. That's an education savings account.
Good luck!!

Answer 4

Dont limit your child to programs like 529 or others that offer tax advantages. It is your dream,but not every child is the same or have the same thoughts as you in their educational future. Some programs the money can only be used for the childs education. Dont be locked into that situation for your children. My suggestion is open a joint savings account and deposit the money monthly. You will pay taxes, but at 25.00 a month the taxes will not be that much. When the child reaches a certain age they could use the money for their own needs. If they are college bound they will use that money toward that, if not they can use it for a wedding or a down payment on a house.

http://www.fool.com/college/college04.htm

Answer 5

I'm not sure of the specific requirements, but your best bet will probably be some form of "529 Plan" or pre-paid tuition plan. These type plans save on taxes and help to lock in today's tuition prices as opposed to paying the higher tuition rates that will exist when your children are ready to go to college. The tax benefit may also allow you to contribute more than $25 per child per month.

Here's a web site that should get you started. You might also want to check with a college in your area. They should be able to give you some guidance in setting up the appropriate plan for your situation. Do NOT go to a bank or a broker for this advice. They will not be the most objective advisers since they will only promote alternatives which they offer or which provide them the most benefit financially.

http://www.smartmoney.com/consumer/index.cfm?Story=200106081

Answer 6

I would buy one fond on each kid. For 25 each the month, they should have a lot of money in 12 years time.
It depends what fond you chose, but I'm sure someone at your bank could guide you there.
I will give you one example: I bought fond for approx. 40 dollars the month. In 7 years I had 15000 dollars.....

Answer 7

First, the kids can help out by working on their grades. With great grades, they will likely be able to get a significant part of tuition covered by scholarship.

Answer 8

Put it all in a savings account, never go into bonds, it'll only make you lose your money. Invest if you think you're are able to read the stock market and know when to buy or sell stocks.

Answer 9

Exclude the illegal aliens and you'll have a surplus by the end of 2011.

Answer 10

Open a brokerage account at Zecco and invest in the ETF DIA.