As a parent, we all have the desire to give our kids a better life than the one we had. One place this will show up with is saving for your child’s college education. Whether you had help with your college or were on your own, most of us understand how nice it can feel to give this foundation to your child. Deciding where you fall on this spectrum can be a difficult one.
Everyone will come to this with a different perspective, but I urge you to take the airplane emergency approach – help yourself before helping others.
This is my checklist before you consider contributing to your child’s college savings:
- $0 of high-interest debt (think credit cards)
- Meeting monthly retirement goals
- Meeting your own savings goals
If you’ve been able to check these off the list, then let’s keep talking. If you aren’t, create a plan to check these boxes off and then consider moving forward.
Taking an Alternate Route
I’m also going to throw in another wrinkle before we get too far. Depending on our child’s interests, traditional secondary education might not be a route they take. I personally have a degree in business. If I were starting college right now, I don’t know that I’d necessarily go to college, especially since many companies are beginning not to require college degrees.
As the landscape of our world changes, I believe that alternative education methods will become more popular, and doing the traditional 4-year route will become less and less the norm. If the traditional route interested your child, highlighting a community college could also be quite helpful. You can get a majority of your general education credits completed at a fraction of the cost.
529 Plan
If you’ve checked the boxes and you’re still interested in saving, here we go. The government gives us this tool called a 529 Plan (don’t you love the original name?).
The 529 plan is a tax advantage account similar to a Roth IRA. It allows you to contribute post-tax dollars towards an investable account for education expenses. Instead of putting money in a savings account, you can begin contributing to this account to allow growth as you continue to save. If you’re aware of the power of compound interest, you understand why this is an advantageous vehicle instead of a savings account.
The downside here is also minimal. If you were to withdraw these funds, you only pay the penalty on the earnings. Even with that, income tax and the 10% withdrawal penalty is likely no worse than if you were investing in a taxable account.
Additionally, if you have leftover funds from this account, you also can use these on other children’s education or even your own. If you were to have multiple children and started saving for the 1st at a young age, chances are you would be pretty safe. You’d be able to use the funds as intended throughout your life.
Note: 529 plans are also state-dependent, and depending on where you live, you may be eligible for tax breaks on your contributions.
Conclusion
Put your mask on before helping others. Once you’re in a place to contribute to a 529 plan, consult your state standards. Also, consider the merits of your child’s path if applicable. If you have a child entering high school, guiding them to the right past post-high school is just as important as the potential financial impacts. The traditional world of needing a 4-year education is becoming unnecessary in many fields, specifically business and technology. In an age of technology, carving your path within education is more viable than ever.`
