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As my wife’s baby bump continues to grow, I have been increasing my research into the unknown world of child development.
Beyond that, I have also been spending a lot of time thinking about saving for college. Many questions come across my mind. The ultimate comes down to this:
What is the best way to save for college?
There are a number of ways you can approach this. But, first and foremost, I have a public service announcement, I must make sure this is abundantly clear.
If you are not saving money for retirement, you have no business saving for your kids college. Retirement always comes first. I know you love your kids like a fat kid loves cake, but you can not borrow for retirement. Your child can work in college and borrow the rest if need be.
I repeat, retirement comes first.
And we’re back.
College is expensive now.
If the latest increase in tuition is any indication of the future, it is going to be really freakin’ expensive when my son turns 18.
So what is a young parent to do?
You can throw your hands up and hope that your kid gets 6-figures in scholarships. I know, I know, you think your kid is the smartest, strongest and cutest, prodigy to ever grace our presence, but in reality this probably won’t happen.
So as with anything, it’s time to take action, and do it now. The longer you wait, the more difficult it will be to save even enough to buy their books, let alone pay their way.
So without further ado, let’s get stacking.
What is the best way to save for college?
There are a few options to saving for college, but as with anything, I like to defer taxes and automate savings. So the best option in my opinion is the 529 Plan.
529 Plan: A 529 Plan is very similar to an IRA. This is an account that contribute after tax dollars, then the money grows tax free. The money will not be taxed when you withdraw as long as you contribute that money towards what are called qualified higher education expenses. This can be tuition, books, fees, some room and board, in addition to special needs expenses.
So, to make it simple, your money that was already taxed goes in, you don’t pay taxes on the gains or on the way out.
Savings Account: A savings account will earn you minimal interest. Usually somewhere around 1%. When you are saving for long term goals, it is much better to utilize something with tax savings and a higher interest rate such as the 529 plan.
Taxable Investment Account: A taxable account would be your normal brokerage account. This would be my #2 choice. The downside is that it does not offer the tax benefits, but can help if you are unsure if your child will actually go to college. It will save you the 10% penalty in the future if there is a high chance your child does not go to college.
What If I have Multiple Kids?
Having to save for more than one child has to make your anxiety spark, but you do have options.
If you have more than one child, depending on how far apart in age they are, you can change beneficiaries once per year in a 529 Plan.
If your kids are closer in age, you may want to open multiple 529 Plans because they will be in college at the same time. You can even make yourself the beneficiary if you decide you want to go back to school as well.
What if my child does not go to college?
If you have a child who wants to be a starving artist, live in the woods, and brew his own beer, then you have a few options.
- You can use the money yourself if you wanted to go back to school (and did not need the money).
- You can give it to your family member who wanted to go to college.
- Lastly, you can withdraw the funds. But, there is a penalty similar to pulling money from your retirement account. You will have to pay the taxes on the gains in addition to a 10% penalty.
When should I start saving in a 529 Plan?
The earlier the better.
If you are expecting and your child is not born yet, you can open a 529 in your name then transfer it over once your baby has a social security number. This would be the earliest possible savings plan for all you hyper savers.
For the rest of us, once your child is born, and you have the extra means, I would not wait much longer. You need to get that snowball rolling as soon as you can.
Every little bit counts. Even if you can only save a small amounts every month, it is much better than your kids having to take out additional student loans.
One trick you can use is to increase your savings by 1% every half birthday. So if your child was born January 1, you increase your savings June 1 and again on January 1 of the following year. This helps lessen the Financial blow, and you can gradually increase your savings to reach your goals.
How can I track my college Savings
I track my son’s 529 plan in Personal Capital. It has the best interface and can consolidate all your other investments into one place.
Additionally, it can calculate if you are on track based on your goals. There’s no more guesswork hoping if you save $100 a month it will be enough to send little Billy to college.
Can you only use a 529 plan at certain schools?
You can use your 529 Savings for to pay for almost any post secondary education. This includes traditional four year universities, community colleges, trade schools, and even study abroad programs.
As of 2018, families can also withdraw $10,000 per year to pay for private, public, or religious elementary and high schools. This is just another exit plan that you can use to your advantage.
Conclusion
Saving for college brings many young parents anxiety. Between all the other expenses you have to cover, how can parents save enough to cover all the costs? The answer is you do not have to. Do the very best you can. Even if it’s a very small amount, it will add up over 18 years. We all want the best for our kids and we are all working hard to give them a better life. That is all any kid can ask for. If you save anything at all, your child is better off than the majority.
Cheers,
Andrew
Andrew is the host of The Personal Finance Podcast, a show that is changing the way you think about your money. His primary goal with the podcast is to bring as much value as possible to his listeners.
Andrew's favorite free financial tool he's been using since 2014 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.
His favorite investment platform is M1 Finance, a site that allows him to build a custom portfolio of stocks for free. It has no trading fees and is his preferred way to invest without having to lift a finger.
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We had three kids and saved some in separate accounts while they were growing up but we maxed our retirement savings out anyway. We told each of them they could go anywhere they wanted but we’d only pay the cost equivalent to the state university which is pretty affordable in our small southern rural state. With that limit they all decided to go to State U and also all got free tuition, fees and room and board since they were good students and the state was trying to bribe engineering majors to stay in state. OK one of them may have fibbed about engineering, she switched to business once she locked down the scholarship, but the others became engineers and one of those is a medical doctor now also. We could have cash flowed the college costs with a little help from the savings we had put back for it but it actually cost us almost nothing for their three undergrad degrees and they all paid for their own advanced degrees. I’d strongly advise making applying for scholarships a major focus because even though we were a high income family there are a lot of non-needs based scholarships out there.