In this series I am covering the 24 tell-tale signs that you could be in financial trouble. Over the next few weeks I will be presenting these signs, how to identify them and tips on how to address the issue.
If you have children it is probably important to make sure they provided an opportunity to seek higher education later in their life. As most people are aware, the cost of college education is not getting any cheaper and in fact it is rising even faster than inflation. To help encourage parents to save for their child’s education there have been many tax incentives and specialized savings plans introduced. While these can be very beneficial ways to save they still may not be appropriate for everyone.
Your Personal Needs Come First
If you have a family there are a few issues that need to be addressed before you start stashing away money for college. First and foremost is some sort of emergency savings. I hate to hammer this topic into the ground but if you are married and have children it is more important than ever to have some money set aside in the event of a loss of income or some other significant emergency. Without this fund you would likely find yourself having to tap into other assets to cover the emergency; whether it is a credit card, retirement plan or even college savings plan, tapping into these can cost a lot of money in either finance charges or taxes and penalties assessed for early or unqualified withdrawals.
The second thing to consider is whether or not you are adaquately insured. Again, when you have a family and your income supports either part or all of the income your life and the ability to work is your greatest asset. Would it make sense to be tucking money away into a college savings plan when you don’t even have enough life insurance to pay for your funeral in the unforeseen event you lose your life? That event could prove devastating to your family.
What About Retirement?
One of the biggest conflicts people face is when they have the basics covered and they try to fund both retirement and college savings. Should you just fund retirement and ignore college savings? Should you begin to focus on college savings aggressively as your child approaches the time to attend college? Or do you find something in between?
Considering that most people can’t even find a way to maximize their retirement savings I don’t think putting a high priority on college savings is a very good idea. One thing about college is the number of unknowns. One thing is for certain about retirement, and that is we will all have to stop working someday whether we like it or not. We will get old and we will reach a point where we are either physically or emotionally unable to work enough to support ourselves fully.
With college there are plenty of unknowns that could affect the need or use of these funds. Will your child go to public or private school? Will they have the grades to attend anything more than community college or a trade school? Will they excel at a sport and receive a scholarship? Will they do outstanding and receive scholarships? Will they aspire to attend an ivy league school? Will they decide to become a lawyer or doctor that requires many more years of graduate school? Whatever the case may be it should be obvious that in the 17 or so years after your kid is born that there are many different outcomes as to what will happen. You are better off taking care of saving for something that is guaranteed before saving for something that is unknown.
But What if I Want to Provide an Education For My Child?
Certainly for many parents they want to be able to provide an opportunity for their child that maybe they did not have. Some parents may not have even gone to college while others may have had to foot the bill for themselves and don’t wish that upon their own child. This is a noble aspiration and clearly weighs on the minds of parents.
The problem is that there are many ways to fund education, but very few ways to fund retirement. If you want to retire will the government give you a loan? No. Will the government give you a grant or can you receive a scholarship for retirement by proving how accomplished you have been in life? No. Can you continue to work while in retirement to pay your way? Yes, this is something you actually can do, but then is it really retirement? Also, as you age you may not be able to physically work. One thing people forget is that our health is largely unpredictable as well. It may seem like a perfect plan to continue to work once you retire from your primary job in order to receive additional income. Well who’s to say you won’t find yourself diagnosed with cancer or another debilitating condition that prevents you from working? If that happens you are in a very difficult situation had you not saved enough as you needed to for retirement.
The bottom line is that there are many ways to pay for a college education:
- The student can work part-time: This one is actually a great option because it can not only provide money to get through school but many times the line of work can be related to studies and actually help the student in getting that first job upon graduation.
- Student Loans: At the very least you can get student loans to pay for education. I understand that this can later become a significant burden on the student after graduation but the money is available either for part or all of the tuition expenses if needed.
- Scholarships and Grants: This item is very overlooked. While this can require some work and possibly good academic records in order to qualify there are a ton of opportunities out there to receive money.
These are not all-or-nothing options either, in many cases you can utilize all three in order to make even a somewhat expensive college education affordable. In my case I had to utilize all three resources. First, I was able to get a little bit of money in the form of scholarships each year. With dozens to choose and apply for usually one would come through. Generally in the range of $1,000-$2,000. Next I worked on campus. Working for the university they paid a decent wage and were 100% flexible knowing that classes come first and even offered work during the summer as an option. That brought in between $5,000-$8,000 each year. And finally the rest of the tab was picked up by student loans, which after all said and done was for less than half of the required amount. It made attending a great university very affordable.
What Should You Do?
None of this is to suggest that saving for college is a bad idea because in fact it is a great idea. The thing to remember is to keep your priorities in order. First you need to be sure you are in a position to provide for your family in the event of an emergency or death. This is a first-line of defense that could make a difference in how your child’s life plays out in the event of something happening. Next you have to make sure you are doing what you can to prepare for your own retirement. Whether you like it or not you will have some form of retirement. The government won’t be there to bail you out. They may be able to provide some assistance with the current social programs but resorting to this could lead to a drastically diminished lifestyle that is borderline poverty.
This isn’t to say that you need to be completely maxing out every retirement plan you have before you can save for education, but it is important to ensure you are not sacrificing your retirement saving ability by saving for college. Remember, in a worst-case scenario even if you haven’t saved a dime for education your kids still have many options in order to get higher education. If the worst-case scenario comes up with retirement you could wind up living a miserable remainder of your life.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
plonkee, you'd be surprised at some of the things I see where I work. I meet with people regularly who have more money set aside for college savings than they do for retirement and many of these people are in their mid to late 40s. They are making a huge sacrifice in doing this.
I am with you in your idea about saving. Retirement comes first for both my wife and I. We don't have a child yet, but even though we aren't maxing out our retirement accounts we will still set up a 529 plan when we do have one. And then we will fund it as money allows. It won't be anything like our retirement savings where X amount goes in each month regardless, like you said it will be more or less some excess money that becomes available.
I agree, you should be allocating money in your budget for college after the allocation that will (eventually) get you in a comfortable retirement.
By this I mean that if I know that I (probably) need to save $100 pcm towards my retirement in order to be comfortable, I first allocate that out my budget and if there is more money I can save, then I may allocate that towards college.