“529s, sure. State-tax deduction, okay. But really, How much should I save?”
That’s really where our anxiety lies, isn’t it? Hopefully the previous blog posts have helped you figure out what kind of account you want to put your child’s college savings into. Now the Real Work begins…
Choosing how much to save
Do you want an unpleasant jolt? Use the “World’s simplest college cost calculator”.
Technically, you should be saving that much every month in order to fully pay for your child’s college education. Realistically, you’re probably going to be constrained by how much you can save, not by what you should save.
I tried it out for my younger daughter, going to college (God willing) in 15 years. For giggles, I have her attending my definitely-not-cheap alma mater, Wellesley College. Here’s what I was told:
If your goal is to cover 100% of the $437,170 <ack!> projected cost of college, you will need to start making monthly contributions of $1,182 to meet that goal.
You know, just-having-launched-a-new-business aside, that’s just not gonna happen. Some parents are in a position to save the full amount, if not now, then eventually (when, say, the cost of childcare goes away).
Whether you’re able to save 100% of the funds or not, consider some of these tips. After all, in financial planning there is rarely a “right” answer, just the best available answer considering your constraints.
- If you have the money to save, set a goal for monthly savings. $50? $100? Set up that deposit to be made automatically from your bank account.
- Have a windfall, big or small? Put some of that into the savings plan.
- Are you using your state’s plan because it gives you a tax break? Contribute enough to receive the full tax benefit.
Balancing between a 529 and Taxable Account
I have written that I favor a mix of 529 and taxable accounts, because it provides both tax benefits and flexibility. Let’s say you have taken my advice (thank you) and set up those two accounts. How should you split your savings between then? Again, there is no one “right” answer. The answer depends on a lot of things specific to your finances and your kid:
Are you using your state plan because it provides a state-tax deduction? If so, I recommend contributing at least enough to the 529 to get the full state-tax deduction.
What do you know about your kid? If she’s 2 ½, like my younger one, you don’t know much, except possibly the upper limits of stubbornness. But if she’s older, is she predictable? Fickle? Can you RELY on her going to college, a particular college perhaps? The less secure you feel making predictions about your child’s college future, the more you should direct to the taxable account.
How disciplined are you at not touching funds saved for particular goals? In any case, I’d recommend a taxable account be set up separately for college savings, to make it clear what the money is for. Do you fear you might still have a tendency to dip into it for other purposes, maybe with the idea of paying it back later? If so, favor a 529, where the barriers to withdrawal are much higher.
You might have noticed a trend in these blog posts…they pose a lot of questions. “Darnit!” you think. “Won’t you please just Tell Me The Answer?!” Sorry, bub. Very little in personal finance isn’t, well, personal. Your temperament, your goals, your numbers. I can give you guidelines and structure, but the right answer for you takes thought and time.
Prepaid Tuition Plans
The question of how much to save is simply answered if you enroll in a prepaid tuition plan. The numbers are given to you by the plan itself. That part is simple. How to actually save that much is another matter entirely. I have a friend in Virginia who was mostly a stay-at-home mom but ran a side business doing photography. All those earnings went straight into the 529 prepaid plan; that was the reason for the job.
Even if you can’t save enough to fund all 4 years of tuition, you have options. Primarily, you can choose to fund only a portion of your child’s college. Maybe you will qualify for financial aid for some part of your child’s college career, so you can use the tuition credits for the years when you don’t receive financial aid.
Don’t forget, though, that these plans only cover tuition. There’s a bevy of other costs you’ll need to cover, and for that, you “should” still save to other accounts, like a 529 savings plan.
Put college savings in perspective
College savings is a fantastic example of a time when you need to take care of yourself before you try to help others, even your kids. You might have heard, “You can borrow for college, but not for retirement.” It’s true! If you’re already saving about 15% of your salary towards retirement (or more, if you want to retire early), then you can afford to save for college. Otherwise, you probably can’t. After all, how kind is it to your children to give them a free ride to college, only to burden them with insolvent elderly parents years later?
For most of us, Retirement and Kid’s College are our two major goals. If Retirement comes first, then College Savings is second. But for some of us, maybe there is another major goal that comes ahead of college. You have to figure out for yourself what your priorities are.
Involve the Whole Family
Even if you don’t have extra money for your kid’s college, it doesn’t mean other people can’t help out. 529 plans often make it very easy for people to contribute to an account that you own. I just set up a new Utah 529 plan for my two children, and helped my brother do the same for his child. He immediately found the page that you can send to friends and family that allows them to easily contribute by bank account or check. (Thanks, bro.)
Also, I am blessed with a sister-in-law who lives in Canada and often has a handful of American dollars from frequent visits across the border, which she generously hands over for the kids’ college accounts. And of course birthdays and Christmas are great opportunities, leaving you to provide the new clothes, bike, or dinosaur collection.
My older daughter recently learned the Hawaiian concept of ‘ohana, which means a very expansive version of “family.” Your child’s education can be a project for your entire ‘ohana.
I’m going to take a break from college planning posts next week to address another pressing matter for those of you living in high-cost-of-living areas: whether or not to buy a house. But then I’ll resume with one or two more installments about college planning!
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