Funding a college education may be one of the most important financial investments you will make during your lifetime.

Unfortunately, the cost of college has consistently outpaced inflation, as it has increased 5% annually over the past ten years. As this trend continues, you may find that you're not able to fully cover your child's or grandchild's education expenses through your regular savings or student financial aid programs.

In order to pay for a degree, you must clearly define your educational goals and build a systematic college investment strategy into your overall financial plan. It's never too early to start! It is far easier to start investing years in advance for a college education than it is when the first tuition payment is right around the corner.

The Fundamentals of College Planning

When it comes to college planning, many people choose to use the advantages of both stocks and fixed income securities. Your mixed portfolio investments should generally depend upon the timeframe between your initial investment and the beginning of college. For a young child, a portfolio weighted more heavily in stocks, historically yields the best returns over the long term. If the child is much older however, a more conservative approach with fixed income investments minimizes short-term investment risk and volatility.

To further offset rising college costs, consider taking advantage of a new crop of tax-advantaged investment accounts including:

• 529 Plans
• Coverdell Education Savings Accounts (ESA)
• Uniform Gift/Transfer

529 Plans grow free from federal and state income taxes. Withdrawals are federally tax-free if used for qualified higher education expenses and depending on your state of residency, earnings may also be free from state taxes. 529 Plans have no income limitations for contributors. They also allow the investor to change beneficiaries once annually and to control withdrawals. The maximum contribution per contributor is $55,000 in the first year of a 5-year period, without raising gift tax issues.

Coverdell Education Savings Accounts (ESA) are tax-free if used for qualified education expenses, have adjusted gross income limitations and allow the investor to change beneficiaries. Control of the withdrawals will transfer to the child when he/she becomes of legal age. The maximum yearly contribution per beneficiary is $2000.

Uniform Gift/Transfer to Minor trust accounts are taxable, have no income limitations and do not allow the investor to change beneficiaries. Control of the withdrawals will transfer to the child when he/she becomes of legal age. The maximum yearly contribution is $11,000.

How to get started!

If you would like to get started on a systematic college savings plan, first you need to determine the type of educational institution in which you are interested, likely enrollment date and the projected costs of tuition, room and board. This should give you a good estimate of how much you will need to start investing in order to meet the costs. Your financial advisor can then help you choose the best, most tax efficient investment vehicle for seamlessly building your college fund into your overall financial plan.