What is the best way to save for my kid’s college education?” is a question that comes up pretty frequently for someone in my field. Many advisers quickly answer this question with an explanation of the various college savings plans parents can invest in for their children’s future. In fact, if you “Google” the title to this article, you will likely find hundreds of articles and blog entries about 529 plans, Minor Trust Accounts, etc. Many articles will try to tell you which education savings plan is best for you-as if they know you and your situation. Aside from the irresponsibility of making such blanket recommendations, doing so fails to consider many other factors that can affect your child’s college and professional path and overall financial situation as an adult.
Planning for college, in my mind, does NOT begin when you open up a college savings fund. College savings accounts can be great, and we’ll talk about those later – but I believe college planning starts in the toy store. It happens right around time a child is old enough to start understanding advertisements for the newest toy on the market and gets that first feeling of “I gotta have that!” Many parents understandably want their children to be happy and just buy the toy. I can’t say I wouldn’t be empathetic and wouldn’t have a hard time saying no. Ideally though, this is a great opportunity to start teaching Johnny about the value of money, the idea of savings, and to instill an appreciation of delayed gratification.
I’m not saying he shouldn’t have it, rather he needs to get it a different way. This is a great opportunity to begin building a well-rounded adult who understands that he or she should never expect to be given something for nothing. I’m not saying that little Johnny or Sally needs to go get a job. After all, I hear it’s a tough job market for five-year old children these days – darn that economy! But, if you haven’t considered paying your child to do extra chores around the house, you might want to. Some people argue that they shouldn’t have to pay, it’s their kid and he/she should do whatever he is told. This is up to the parents, and I can understand it I suppose, but it doesn’t teach anything. This is ineffective especially when the same parents go buy toys for the child, circumventing the entire lesson of responsibility. So the kid gets the toy, learning nothing about money or hard work, and just learns that as long as he stays on mom’s good side he’ll get whatever he wants.
If the budding youngster is told he can work for a dollar per chore to save up for his $85 remote control car, and that’s the only way he’ll get it, everyone wins. He/she may fight the idea at first or say it’s not enough money or he’ll just go without the toy. Hold your ground, though, and you’ll have a clean house, shiny cars, and a five-year-old that knows how to fold his own laundry. Johnny will have his robot; he’ll associate that gratification with hard work and realize the value of $85 that couldn’t possibly have grown on a tree. Priceless. Of course, you’ll have to teach him these things, but shouldn’t he learn them anyway? Once he understands work = money = getting what he wants and the parents maintain that understanding, he will probably figure out how to get a job as soon as he can and be well on his way to self-sufficiency. I got my first job at age 14 and have enjoyed working ever since.
What on earth, you may ask, does this have to do with planning for college?!
Well, now that Johnny understands the value of a dollar and saving to get what he wants, it’s time to teach him the value of saving for general things that he may not want yet, may not expect, and may need at some point in the future. Of course, it’s unlikely that he’ll pay for his entire education, but stay with me.
The examples are endless, but raising a responsible individual who understands the causal relationship between hard work, money, savings and success can go a long way in lessening the cost of education at a four-year university. I’ll name a few here
1. A 17-year-old who has understood savings and budgeting concepts for 10+ years is going to be much more understanding of what type of education he/his family can afford and will keep that in mind when he applies. He/she will understand the importance of applying for grants and writing essays for scholarships, and he’ll be more well-rounded and qualified to get them! The only people I know who didn’t get some kind of grant for tuition are the ones who never applied because they didn’t understand the value of money saved – and we’re talking about tens of thousands of dollars they let just slip by!
2. Roth IRAs- yep, once your child starts earning taxable income, they can begin saving in their own Roth IRA that can grow tax-deferred and be used for qualified education expenses. Even if Johnny earns $3000/yr and spends every dime after withholding, the parents still have the option to put in an amount up to his after-tax earnings of $3000, subject to the IRS limit of $5000/yr. These accounts can have little or no fees compared to more expensive college savings accounts. If he doesn’t use it all for school, he’s got a leg up on his retirement planning. Your son is going to be a financial rock-star compared to his peers.
3. If he has been working for some time, he’ll probably appreciate the independence afforded him by having a job and paying for his own things and will not hesitate to work through school. This is huge but will be tough to accomplish with a child who hasn’t had to work much before. Think of this as a zero-sum reduction in your college expenses. If Johnny makes $1200/month working part-time in school, that is $1200 you don’t have to spend or cover with a savings account.
4. All the money that you saved throughout Johnny’s youth by having him work hard for his things instead of buying everything for him can be applied elsewhere. You can put it into whatever college savings account you and your adviser decide is best. Since you’ll have more and need less(for a student who works) maybe put some of it towards a musical instrument and some lessons, making your progeny all the more likely to receive grants and scholarships for school costs.
Here are some other brief tips that can save you and your offspring thousands of dollars along the way. Teach them to shop smartly, both for clothes and groceries. Yes, I said groceries; it’s part of teaching them to cook so they don’t just keep their neighborhood domino’s pizza afloat for four years. Don’t buy them a car. Instead, offer to match whatever they raise towards one. This is a good way to provide incentive and make sure they can still afford a reliable, safe vehicle. Put the money you save here towards their college savings. Are you getting the theme of all this?
College savings is not about looking for the best account that’s going to miraculously grow everything you put into it. We’d be happy to talk to you about the various plans available and what you need to put away, but don’t forget that it starts with raising a responsible, independent individual. This leaves you with a substantially smaller financial liability and at the same time allows you to accumulate more assets to fund the liability of a top-notch education.
Final note: Not only are you preparing for college, you’re preparing someone for life. I know too many people, especially in my generation, whose parents never taught them about financial responsibility. The ones whose parents did pass on this life lesson look back on it with immense gratitude.
