How much should I be saving for college? This is one of the first questions I hear from almost every client and friend. No matter if they are super wealthy or up to their eyeballs in debt, college savings is one of the first topics of conversation and biggest financial stresses for parents.
I get it…as parents we want to provide for our children. We know how important education is. We also know how insanely expensive college can be (and how much MORE insanely expensive it will be in 5-10-15 years). And we are bombarded by the media, advertisements, friends, grandparents, etc. about starting early. You feel like if you didn’t start at the first sonogram saving to pay for Harvard by the time your little one is 18 that you are somehow a bad parent. It is a lot of pressure.
But in the big picture of your financial life, there are three things more important that you MUST do before you start saving for college.
1. Eliminate debt, and then live within your means
It makes no sense to put cash into a college savings plan instead of paying off credit card debt that is charging high interest rates. The college savings will not earn 15%+, which is how much the debt probably costs. Save for, pay for, or borrow for college later (hint: college loans are cheaper than credit card loans). Get you own financial house in order first.
2. Have a rainy day fund
If something unexpected happened, car breaks down, air conditioner goes out, loss of job, etc., do you have money saved that you can access quickly and without penalty when you need it? When things like this happen in life, you need money NOW for your family. Transportation, air conditioner, groceries, taking care of your family today will be a priority over college savings. Make sure you have savings for the unexpected. If you are fortunate to never need to dip into this fund, you can use this money for college!
3. Save for retirement
College loans are available, but there is no retirement loan. I hope you love what you do for a living, and I hope you want to do it forever. But chances are you will want to or be forced to stop working at some point in your life. Get on a savings path today to pay for your own retirement. Don’t rely on your kids to support you in your later years. Unfortunately, I see it more often the other way around with parents continuing to support children into their 30s and 40s, even when their own savings don’t support it (but that is for another day’s post).
College will accept your money wherever you pull it from. It doesn’t have to come from a 529 or other officially designated education account. When time to pay tuition, if you have only saved $10,000 for college but have excess savings elsewhere, then use those funds (as long as doing so does not compromise your own goals and retirement). You can even withdraw from your IRA without penalty (it is still taxed) to pay for college.
Your kids will be OK. Talk to them about your situation and the cost of college when it comes time to choose a school. Maybe they or you have to take a loan, maybe they make smart decisions about cost/reward of where they go to college, maybe those decisions make them appreciate their education more than if it was handed to them on a silver platter. Work to help pay for tuition, go to community college for a year or two, apply for scholarships, etc. Resist the pressure to put a college savings plan ahead of your own financial future and empower your children to be financially responsible humans.