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4 Steps to Create a College Savings Plan

Paying for college is an important goal for many families, but the large price tag can make it seem overwhelming. After the purchase of your home, your children's college education may be the largest purchase you'll make during your lifetime. Lik...

Bruce Helmer and Peg Webb, financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings.
Bruce Helmer and Peg Webb, financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings.

Paying for college is an important goal for many families, but the large price tag can make it seem overwhelming.

After the purchase of your home, your children's college education may be the largest purchase you'll make during your lifetime.

Like any large investment, saving for college requires planning. If you're looking to begin saving for your children and grandchildren's college education, consider doing the following:

1. Estimate future costs: Estimating what college costs will be in the future is difficult, especially if you're projecting for a very young child (or even a child you haven't had yet!). There are a number of calculators you can use that provide various estimates for the grand total of a four-year degree, but it's anyone's guess just how accurate they'll be 10-15 years from now, especially when you consider the costs of college have risen much more quickly compared to the rate of inflation in recent decades. How quickly college costs rise over the coming years will have a big impact on what you should reasonably expect a bachelor's degree will cost, let alone what graduate school could cost.

2. Calculate what you can reasonably save: After estimating your future costs, it's easy to look at that number and simply think there's no way you can save that much money. It's true that many families can't afford to pay for four years of college out-of-pocket, but any amount you are able to save can have a big impact once your children are ready to enter their freshman year. Keep in mind that you won't just save that money; you'll also likely invest the money (see point No. 4) so that it has a chance to grow in a tax-efficient manner.

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3. Be realistic about financial aid: If your college savings plan is a scholarship, you may want to reconsider. Only a very small number of students are able to earn a full-ride through college because of athletics or academics. Look into loans, grants and work study programs. These can all help bridge a financial gap in your college savings plan.

4. Decide how to invest the money: There are a number of strategies you can use to maximize your college savings, and one of the most popular is a 529 plan. Although contributions made to this account aren't tax-deductible on your federal taxes, they do grow tax-free if used for qualified education expenses.

Some states also offer benefits on state taxes, too. While citizens in Minnesota don't receive a deduction on their state taxes, readers in Wisconsin will be able to deduct up to $3,100 in contributions made to an in-state plan for each beneficiary on their state income taxes. You can make contributions for 2015 until April 15, 2016.

A Coverdell Education Savings Account, Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) are other popular vehicles to save for college. Talk with your financial adviser when beginning your college savings plan to see which is best for your family.

Whether you started saving when your kids were babies or you started when they were teenagers, remember this: All you can do is all you can do. Saving any amount you're able is a tremendous accomplishment and a great gift for your children and grandchildren.

By Bruce Helmer and Peg Webb, financial advisers at Wealth Enhancement Group and co-hosts of "Your Money" on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com . Securities offered through LPL Financial, member FINRA/SIPC.

Related Topics: EDUCATION
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