I listen to the Pete the Planner podcast regularly but have yet to come across an episode that has answered a particular question that I’ve been researching. Although I have picked up some good strategies and methods for college savings from listening to Pete, I was hoping to obtain some information pertaining to how much I should be saving for my kids’ college. I have two boys in grade school, and although I’m a bit behind, I have been making an effort to make up some ground. Any best practices, rules, etc. that I can implement to set a specific savings goal for each of my kids?
Thanks in advance,
Did you ever read choose your own adventure books when you were a kid? You know, stories where you’d be traveling across the Old West trying desperately to avoid typhoid fever, native Americans unhappy you were encroaching on their territory, cattle rustlers, and of course, dysentery? You’d read a page or two, then be faced with a choice. Do A or B. Then, turn to the corresponding page and prepare to make your next potentially life altering decision.
Saving for your children’s education may not come with quite as many hazardous situations as a choose your own adventure book, but it does require you to make a very important choice up front that can determine the rest of your approach.
How much of your children’s education do you want to pay for?
I understand that the knee-jerk, not to mention publicly expected answer is to say, “I want to pay for it all!” However, that’s just not possible for the majority of Americans today. The cost of college has exploded over the last two decades. Unless a family makes it a priority from the outset, and puts money aside consistently, it’s unlikely they’ll be able to save enough to cover all of the expenses associated with a college education. This leaves the student bearing some of the responsibility of funding their education. That’s fine, but it’s important they understand all that goes with it. I don’t know exactly how old your kids are, Chad, but I encourage you to start having that conversation with them as soon as you feel they’re ready. A student’s understanding of the costs of education and the resources available to them can make the school selection process, as well as any education loan repayment during the post-college years, a more palatable experience for all involved.
Once you have your goal set, it’s time to do some math. Or, you can do what I do, find a good calculator online. I like the College Savings Planner that Vanguard has available on their site. You’ll have the opportunity to experiment with costs and contributions until you know what is and isn’t reasonable for you. And when I say experiment, I mean it. Play around with the inputs of cost and contributions to see how they affect the outcome. If you want to adjust the rates of return on your investment and the expected inflation of college costs, you can do that, too. Taking time to try different combinations will give you a deeper understanding of how all of the pieces fit together.
If you haven’t settled on how you want to set funds aside for this goal, I suggest looking into 529 College Savings accounts. Many states have income tax benefits based on your amount of contributions, giving you an immediate benefit. Then, if the money is then used for qualified expenses (tuition, room and board, books, technology, etc.), when your kids reach college, you’ll be able to withdraw the money tax free. Look up your state 529 and “tax incentive” and see if you find anything. You may be surprised!
And that’s it. Set a goal and make room for success in your budget. Make your contributions consistent. Then, if any new income happens to show up in your account (overtime, raise, promotion, side hustle, garage sale, black market kidney sale, whatever), have a plan for what you’ll do with that new resource. Maybe it goes to the 529, or maybe it doesn’t. But, like all good advice, it comes back to having a plan.
Like, how to avoid dysentery.
Damian is the lead Financial Concierge on Your Money Line, the financial help line serving all Pete the Planner® Financial Wellness clients. Damian is a CERTIFIED FINANCIAL PLANNER™ professional and loves answering your money questions. Despite sharing a last name and sense of humor, Damian and Pete are not related.