Money Management

Worried you’ll fall short on college savings? Here’s what to do. 

Maybe your goal is to save enough money to put your kids through four years of private college. Or maybe you’ll be happy if you’re able to cover tuition and room and board for an in-state public school.

No matter your personal college savings goals, it’s important to feel confident about your ability to meet them. But data from Vanguard reveals that most parents aren’t feeling optimistic. In fact, only 16% think they’re in a great position to meet their education savings goals.

One thing you should know is that the sooner you begin saving for college, the more likely you are to be successful in accumulating enough money to fund your kids’ education in full. But starting early is only half the equation.

It’s all about putting your money to work

Some people begin saving for college the moment their children are born. And while that might seem extreme, remember that you might have a 40- to 50-year career to save and invest in an IRA for retirement. On the other hand, you might only have an 18-year window to build up a college fund, so it’s important to get started as early as possible.

But you don’t just want to save money for college. You also want to invest that money. Doing so could mean ending up with a lot more funds by the time your kids’ tuition bills start coming due.

Over the past 50 years, the stock market has rewarded investors by delivering an average annual 10% return (before inflation), as measured by the S&P 500. So, let’s say you’re able to save $300 a month for college for your kids over an 18-year period. If you keep that money as cash in a savings account, you might get 2% to 4% as a return over time. On the higher end, you’d be looking at a college fund worth $92,000. That’s not a small amount of money, but it may not be enough to cover costs for multiple children in full.

On the other hand, let’s say you invest your $300 a month during that 18-year period and snag a 10% average annual return. That leaves you with $164,000 in college savings, which could do a lot more for your kids.

Where to invest your money for college

You have options when it comes to finding a home for your college investments, but two choices worth looking at are 529 plans and Roth IRAs. Both accounts allow you to enjoy tax-free investment gains as well as tax-free withdrawals when money is taken out to pay for college.

However, both plans come with restrictions. With a 529 plan, you’ll be penalized for removing funds for non-education purposes. And Roth IRAs come with annual contribution limits you’ll need to adhere to. As such, you may decide to forgo the tax break these accounts offer and invest for college in a regular brokerage account. You’ll lose out on some benefits by going this route, but you’ll also enjoy more flexibility with your money from start to finish.

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When choosing a bank account for your kids, there’s a few key features you want. Keep reading to learn what they are and why they’re important. 

Opening up a bank account for kids can be a great way to teach your children about money. They can develop the habit of saving so they are less likely to get into credit card debt. And they can learn about how to manage their account and keep track of their spending.

But you want this to be a positive experience, so it’s important to find the right bank account for your kids. Here are a few things to look for.

No monthly maintenance fees

Many banks charge monthly maintenance fees. While these can sometimes be avoided if you have a direct deposit put into your account or if you keep a certain amount of money in there, kids are probably not going to be able to do either of these things.

There is absolutely no reason you should pick a kid’s bank account that causes your child to lose money to the bank. Steer clear of any account that charges fees. In fact, you may want to go a step further than just looking at the fees for the children’s account and see what will happen when your kid ages out of eligibility for it. If the account converts to a normal one with fees, you may want to look elsewhere.

There are plenty of fee-free options out there — especially among online banks — so teach your kids how to look for a financial institution that won’t make them pay to do business.

Fee-free ATM access

Your children are probably going to want to take money out of their bank account at some point. When they do, they aren’t going to want to pay an ATM fee. So be sure you find a bank account for kids that allows them to use an ATM card and get money out where and when they need it.

That way, they won’t get discouraged by the banking system for trapping their money and making it costly and difficult to gain access to their own cash.

A generous APY

When you open a savings account for your kids, they can start to learn about interest — and can earn a little bit of interest income in the process. You’ll want to make sure you get an account with a high interest rate so your kids will be excited to see the rewards of savings. Some savings accounts for kids pay a substantially higher rate than others, so be sure to shop around and compare APYs carefully. There’s no reason to leave money on the table.

Financial literacy tools

Finally, consider looking for a bank that provides tools and education to help your child develop a better relationship with their money. This can include everything from financial education geared to kids to an easy-to-use mobile app or website that helps kids set and track their goals.

By taking the time to look for each of these features, you’ll be able to find the perfect account for your child. Just remember to also make sure it’s easy for you to monitor their bank account use and easy for you to move money over if needed, in case you want to give your kids a little extra help bulking up their bank account balance.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Looking to work for yourself instead of an employer? Read on to see how that might impact your tax situation. 

The decision to become self-employed isn’t one to take lightly. When you go the self-employment route, you give up a steady paycheck for what could be an extremely variable income. That could make it a lot harder to budget and cover your expenses.

You should also know that becoming self-employed could result in quite a few changes from a tax-filing perspective. Here are a few things you should know.

1. You may be privy to extra tax breaks

When you’re self-employed, you get to deduct expenses you incur that make it possible to earn money. Racked up a $100 credit card charge for materials needed for a recent work project? That bill could be tax-deductible. The same holds true for services you pay for that enable you to do your job, like an internet connection.

That said, you do need to keep meticulous records when you’ll be deducting self-employment expenses on your tax return. And you may want to consult an accountant before claiming deductions you aren’t sure about. The last thing you want to do is risk an audit because you took a deduction the IRS thought looked suspicious.

2. You’ll have to pay the IRS as you go

When you’re a salaried employee, your paychecks represent your take-home pay after taxes have been withheld for the IRS. When you’re self-employed, you get paid your wages in full. And so it’s on you to send the IRS money every quarter in the form of estimated payments.

Estimated payments are due in April, June, September, and January. Usually, they’ll be due on the 15th of the month, but if the 15th falls out on a weekend or holiday, the deadline usually gets pushed out to the next business day.

3. You’ll be on the hook for self-employment taxes

It’s not just income tax you’re liable for as a self-employed individual. You also have to cover self-employment taxes.

Salaried workers have FICA taxes to cover Social Security and Medicare taken out of their paychecks, and their total tax burden there is split with their employers. When you’re self-employed, you have to pay all of that FICA tax, or self-employment tax, yourself.

Now, the tax rate on Social Security is 12.4%, but that only applies to wages up to a certain limit that changes annually. This year, that limit is $160,200. You’ll also have to pay a 2.9% Medicare tax on all of your income.

Know what to expect

From a tax perspective, being self-employed can be both a positive thing as well as a negative one. So the most important thing to do is know what to expect. And also, find yourself an accountant who can help you maximize your tax breaks while helping to ensure that you make all of the required tax payments you’re supposed to.

An accountant, for example, can help you calculate your estimated quarterly tax payments so you’re paying the IRS the right amount based on your income. They can also advise you on ways to lower your taxes without putting yourself at a higher risk of an audit.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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