5 Questions to Answer BEFORE Saving for Your Kid's Education
Ensuring a good future for your child is a non-negotiable. However, there are a few things to consider first…
Saving for your child’s education may feel like the single most important thing you save for right now. But what if it isn’t?
Yes, you should have money for your child’s education, but there may be other priorities you must put in place first before saving money for your child’s education. Before you create a savings plan, ask yourself the following 5 questions.
1. Is your Financial House in Order?
As parents it’s natural to put our kids before everything, but there are certain times you have to come first, and your finances is one of them.
If you don’t have your financial house in order, how will you ever provide for your child? Not getting organized now could have detrimental effects on your children as they get older. Just like the old saying goes “you can’t pour from an empty cup,” you can’t survive in life with an empty bank account. Filling your own cup first is nothing to feel guilty about.
To see if you’re on the right track, make sure you have the following BEFORE you save for your child’s education:
Emergency fund – Your emergency fund should cover your expenses if you lost your job or were unable to work for an unavoidable reason. It should cover 3 to 6 months of expenses depending on your personal comfort level and whether you have a single or dual earner household (dual incomes allows you to be on the lower end of this range).
Debt – Try to payoff high interest consumer debt first (debt outside your mortgage). If you carry high-interest credit card debt, consider eliminating it first before saving for your child’s education. You’ll rarely ever out earn (through investing) the interest you’d pay on credit cards so pay it off first.
Retirement funds – Your kids are with you for 18 years, but you have the rest of your life to provide for as well. You must put yourself first and save regularly for retirement. Should you neglect your future, you may end up needing to lean on your kids in later years and that’s never an ideal situation. I can speak from experience as someone who helps support his parents financially.
2. Are you and your Spouse on the Same Page?
This can be an area of disagreement, so prepare yourself for a honest and transparent conversations with your spouse.
For example, if you believe in fully funding your child’s college education and your spouse believes in letting your children figure it out with loans and their own savings, you might have to find the middle ground.
Any money you save for college or other educational expenses is an opportunity cost for other financial goals including retirement, emergency funds, or other long-term goals you might have.
Come up with a plan you both agree on and feel good about. Think of the consequences of the plan too (the next point).
3. What are the Opportunity Costs of Saving for College?
Think about the tradeoffs of saving for college. For example, if you didn’t save for college expenses and were able to stay home, is the time you can spend with your child more valuable to you than paying for college that they might or might not attend? Will one spouse have to work longer or stay at a stressful job to meet the high cost of paying for college?
If you decide to work full-time and sock away money for education, what will you miss out on? Here are just some things to consider:
School events
Volunteering in the classroom
Traveling with your child
Spending one-on-one time with your child on a daily basis
Helping with homework or daily chores
Even if you aren’t the spouse that stays home, but you have to work longer hours or take on another job to have enough to save for your child’s education, think about what you’re losing in the present moment to determine if it’s worth it.
4. Will you Save for Public or Private School?
Chances are you and your spouse have a strong stance either way on the public vs private school debate. You might be on the same page or have different beliefs.
The key is to find a middle ground. Again, listen to one another’s thoughts and feelings and decide how it might affect how much you save. If one spouse is pro private school, find out why. What makes it so different to them than public school?
Next, listen to the other side about why public school may be perfectly acceptable. In society, there’s no right or wrong answer to the debate, but financially it can make a tremendous difference on how and where you save your money.
5. Is a 529 Plan the Best Place to Save for Education?
If you’ve decided to save money for education, you must decide where to save it. Most people choose the 529 savings plan by default. The tax benefits lure people into thinking it’s their best option.
It is true that your earnings grow tax-free (if used for qualified education expenses) and you might get a tax write-off in certain states when you contribute to it, but there’s a catch.
If your child doesn’t end up going to college, you will not only pay taxes on the earnings, but also a 10% penalty if the funds aren’t used for qualified education expenses.
Alternative #1: A Taxable Investment Account. If your child decides not to attend college, or goes to a cheaper college, or only does 2 years instead of 4…. you can use the remaining funds for any other purpose without penalty. You’ll be liable for taxes on the growth of the investment when you sell in a taxable account, but that may be an acceptable tradeoff for having flexibility with that money.
Alternative #2: The Hybrid approach - Save to a 529 plan and a taxable investment account. This ensures you get some tax benefits while still retaining flexibility if your child’s education expenses don’t occur or are less than anticipated.
Final Thoughts
Saving for your child’s education likely feels like the most important thing you must do right now but… it’s important to fill your own cup first, then give from the overflow.
Take a step back and look at your financial situation and the likelihood of your child going to college and needing funds. What if your child can get a full scholarship or grants? There’s also nothing wrong with having children take some responsibility for their educational costs since as parents, you’ll have the burden of your own retirement on your hands in the near future.
Think about your options carefully and don’t feel guilty if you put yourself first. You have a lot to take care of financially as parents, so spreading your money out right is important.
A financial planner can help you create a holistic plan around saving for college, retirement, and all the other key areas of your financial life. If finding balance between saving for your kids future as well as your own is important to you... Schedule a free 30 minute introductory call with me here
Together we can explore “you” in a way that’s deeper than dollars and cents, and start a conversation to get you and your partner on the same page financially. I’m here to help you create a vision for your life, then back into the money moves needed to bring that vision to life. You can live for an epic life today, while still being on track for tomorrow.
Jonathan Grannick, CFP®
Wonder Wealth LLC
San Diego Financial Advisor | Fee-only Fiduciary
Disclosure:
None of the information provided is intended as investment, tax, accounting, mental health, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Wonder Wealth LLC does not promise or guarantee any income or particular result from your use of the information contained herein.