Please don’t hate me. I’m very proud that you’ve been following my advice (and the advice of my PF blog constituents) to start saving for retirement, etc. But now we’re going to talk about something that may require you to dig just a little deeper into those pockets of yours:
“I Don’t Even Have Kids Yet!” Why Do I Care?
I know some of you are pretty young and just graduating college yourself, while others of you may have recently got married and just had children. These are all great positions to be because, like most savings strategies, “more time” is our friend.
However, this post is going to assume that someday when or if you already DO have kids, that you’ll want to send your little Princess or Jedi (… there’s a Star Wars theme going on in my house right now) to college and give them every advantage possible.
What’s Going to Be the Damage?
(… Queue the scary theme music from the Halloween movie …)
A quick review of my alma mater’s website estimates the following 2011-12 costs:
• Two semesters of in-state undergrad will cost $21,026 (assumes $12,822 for Tuition and fees at 15 credits/semester and $8,204 for housing and meals).
• That’s a total of $51,288 for four years (120 credits – even though most people probably take closer to five years now) if you just isolate the tuition and fees.
That cost of $13K is roughly twice what I paid for tuition when I started 14 years ago. For simplicity, let’s assume that by the time your kids are ready to go to college (let’s say 18 years from now), the price doubles again:
• Approximately $102,576 for four years or $25,644 per year! Ouch!
If you invested in a set of semi-conservative funds returning a combined annual 6% return over the next 18 years, that means you’d need:
• $3,131.14 per year or $260.93 per month!
Who Do You Love?
Great, huh? If you were struggling to make room in your budget for retirement, how are you going to save $261 per kid per month for the next 18 years?
• Answer: You’re probably not.
That’s right. As much as we’d all love to give our kids everything in the world, the reality is that there simply may not be enough money to go around to FULLY fund both your future and your children’s education. Given the choice between the two, please remember:
• Make sure you pay yourself (and your retirement) first before you worry about budgeting for college savings.
Now before you equate this statement to having your children wake up on Christmas morning with no presents under the tree, keep the following things in mind:
1) Your kids can always get a loan for school. You can’t get one for retirement (… at least not any kind of loan you want anything to do with).
2) Your kids will always be able to work off their loan throughout their most productive years. You, however, will have less and less potential to keep working the older you get.
3) There is always the possibility that your child may not want to go to college. You, on the other hand, will certainly want to be retired someday.
What You Can Do:
Notice earlier I said you may not be able to “FULLY” fund their education. What about “partially”?
Maybe I won’t be able to save the full $102,576 per child, but I could probably still invest about $100 per month! Remember that every little bit helps!
Just like retirement accounts, college savings plans have different advantages over regular-old savings:
• 529 Plans – This is one of the plans I use. These types of accounts are kind of like an IRA except that the proceeds are intended for college and have State tax benefits. In general, the range of things you can use these funds for is pretty wide (tuition, fees, room and board, books, etc). One negative is that the choices for the investments is usually pretty slim.
• Pre-Paid Plans – This is where you literally “buy” a semester of college today that your kids can use later. Each State sets their own fixed prices, but it’s hard to say if the price is a bargin or if it is too expensive. Check the fine print – the “plan” you buy usually DOESN’T include room, board, books, etc, so you’ll still have to find a way to pay for these on your own.
• U.S. Savings Bonds – At last check, U.S. savings bonds were tax exempt if used for higher education costs. Bonds would have been a “better” investment years ago, but with recent events, they have been paying VERY low rates lately. But things could always change!
• Personal Investments – Although usually not the most tax savvy, there is nothing stopping you from buying a hybrid mutual fund to use one day for college expenses. I’ve got the Vanguard Star fund setup for my kids. Dividend stocks are also another place to look for slightly less tax burden. And finally you can always leverage the power of high yield savings accounts.
With any of these investments, remember:
• Don’t go too risky. You don’t really have that large of a time-frame to invest within.
Readers – How will you save for your children’s education? Do you have a goal in mind, or do you plan to save whatever you can? How does your retirement stack up against college planning? Does $102,576 seem out of whack, or have you heard other similar insane projections for future college costs?
Photo Credit: Microsoft Clip Art