Having children is one of life’s greatest joys, but paying for them is one of life’s greatest expenses. While it’s usually said jokingly, this time of year my younger clients often say, “College savings? I’m still trying to pay for Christmas!”
This was my daughter’s first Christmas. I had a client recently tell me that inevitably, I will accumulate a giant bin full of Chinese products in my living room that she will rarely play with, if at all. So, being a thrifty financial planner, I asked family members to spend half of what they had planned for toys and clothes and put the other half in my daughter’s 529 College Savings Plan. I was pleasantly surprised at the amount of the combined contributions.
In keeping with my New Year’s resolution theme this month, I want to share some thoughts on saving and investing for children since this seems to be a financial resolution for many parents. Here are some thoughts:
Start saving soon and often—every little bit helps. College costs are rising faster than the overall inflation rate. For example, UNCW costs went up an average of 6.4% last year. The national inflation rate was less than 3%.
See specific costs for colleges here: http://nces.ed.gov/collegenavigator/
For my daughter, who was born less than 1 year ago, I used UNCW’s average in-state costs (room & board, tuition, fees, etc.) as a baseline and assumed a 5% long-term cost inflation. I also assumed I could make 7% on my investments. My calculations revealed that I need to save/invest $369 per month from now until she graduates from college.
See a simple college savings calculator here: http://www.savingforcollege.com/college-savings-calculator/
Here are some things to consider. First, your kids can acquire loans, receive scholarships, and work their way through college; but you can’t borrow or work your way through retirement, and I haven’t seen a retirement scholarship or grant yet! So, if you aren’t saving enough for retirement, focus on that first, then consider what you can set aside for college expenses.
Next, consider how much you want to pay. Some parents want to pay 100% so their kids can focus on studying and avoid the burden of student loans. Others may feel it’s important for kids to earn their way and pay for some or all of their college expenses. Some parents want their kids to experience life on campus, while others perceive “dorm life” as a hindrance to education. Living at home or attending a community college can greatly reduce costs but may not match your family’s intentions. Be sure to consider your options and goals before setting up your savings strategy. Also, use the process as a means to teach your children. Someday, they will likely face these same financial issues and challenges with their own kids.
Don’t focus solely on college. Although I'm a big supporter of the tax benefits of 529 plans, North Carolina recently removed state tax deductions for contributions, so there’s no immediate tax benefit to the contributor. Plus, college isn’t their only expense. Setting up an account in your name that can be used for camps, cars or computers along the way is also a good idea. You can always use it for yourself if you need to, or if your child decides on a Harley Davidson instead of Harvard or Davidson.
Don’t forget other big-ticket items. College is certainly a priority for most parents, but you may also be passionate about paying for future weddings or down payments on first homes. Again, your savings strategy should be driven by your goals and your money values.
Finally, don’t overlook opportunities to build your own balance sheet. If you have a responsible young adult, buying a place for his or her housing needs can be a smart financial move. You will need a larger deposit for an investment property than a primary mortgage, but you can assume four years of rental.
I wish I had bought a condo when I moved to Wilmington to go to UNCW. Oh what a payoff that would have been. I won’t miss that opportunity again. Plus, you can maintain some insight into whether your college investment is paying off by keeping a closer pulse on your child’s behavior! I’m personally hoping my daughter goes to school where they have great waves, a fantastic city or great football, because I plan on keeping one room open for me for frequent weekend visits! I hope she doesn’t mind!
Jason Wheeler is currently the CEO and a Wealth Consultant at Pathfinder Wealth Consulting. Pathfinder specializes in comprehensive financial, estate and tax planning services, investment management, and risk management (insurance) for business owners and successful executives. Jason Wheeler offers securities and advisory services through Commonwealth Financial Network®. Member FINRA, SIPC, a Registered Investment Adviser. To learn more about Pathfinder Wealth Consulting, visit www.pathfinderwc.com. Jason can be reached at [email protected] or 910-793-0616.
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