This article is an excerpt from the Shortform book guide to "The Wealthy Barber" by David Chilton. Shortform has the world's best summaries and analyses of books you should be reading.
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Do you have a plan to pay for your child’s education? What option is best?
Paying for your child’s education likely will require advance planning and many years of investment. In The Wealthy Barber, David Chilton recommends having a mutual fund for this purpose. He discusses the advantages and the timing for when to redeem the funds.
Read more for advice on how to save money for college.
Save Money for Your Children’s College Fund
If you have kids, you may want to start saving for their college fund. There are many valid options for doing so, but Chilton’s advice on how to save money for college is to make a monthly payment toward a mutual fund for your child, just as you do for yourself.
Like all investments in mutual funds, this approach works best if you start early, when your child is young. When your child is within a few years of college, look for a good time to redeem the funds (don’t wait until the last minute or you may be forced to sell when the market is down). There are limits on how much a child can earn in investment income without being taxed; an advantage of mutual funds is that the dividends they pay are usually under these limits.
Some other options for saving for college include US Savings Bonds, prepaid tuition plans, and education savings plans, or education IRAs. US Savings Bonds are guaranteed by the federal government, use an adjusted interest rate, may receive preferential tax treatment, and are exempt from state and local income taxes.
With prepaid tuition plans, you pay for tuition years before your child goes to college; the price is based on variables such as the state’s estimate of how much tuition rates will rise in the future. The advantage of this type of plan is that if tuition costs go way up by the time your child goes to college, you will have saved money. One disadvantage of prepaid tuition plans is that students have a limited choice of schools—these plans usually only cover public universities within your state.
With an education savings plan, or education IRA, you make contributions up to a certain amount in a tax-deferred account.
(Shortform note: In The Total Money Makeover, Ramsey recommends saving for college using an education savings plan, or Educational Savings Account (ESA). He says prepaid tuition plans just break even with inflation, while savings bonds and whole life insurance for babies generate returns of only about 2-5%. An ESA funded in a growth-stock mutual fund, however, can achieve much higher rates of return.)
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- A guide to becoming financially successful by following simple principles
- Why you might not need to buy life insurance
- Why you should only buy a house if it’s right for you