Monday, March 3, 2008

Money Monday - Budget, Part 6

Saving For Your Child's College Education

While many people will argue with this, I want to preface this topic with my own personal opinion: There are several successful people in the world who did not go to college. College is not an absolute necessity to having "the good life". In recent years, experience has begun to weigh more and more heavily over having a college degree in one's line of work. While it's possible that you might start out making more money with a college degree under your belt, that isn't always the case. And to be blunt: Life isn't about the money (although, sadly, our culture seems to think it is).

That being said, it is important to plan for your child's future. Even though life isn't about the money, we can't exactly live without money either. If you are in a mess of debt due to mountains of student loans, you can easily understand why sending your child out of the house with NO debt is the absolute best plan for them. (Of course, in order to keep them out of debt you need to teach them BY EXAMPLE how to manage their money wisely before they leave the house - but that's a whole different topic).

You may be wondering how much you need to save for your child's college education. I recommend using a monthly college planning form to figure this out. Once you have determined how much you need to save, you need to take a look at the options for saving for your child's college education:

ESAs (Education Savings Accounts a.k.a. the Education IRA)
This account grows tax-free when used for higher education. You can invest your money anywhere, in any fund or any mix of funds, and change it at will. It is the most flexible form of college savings plans. The ESA currently (someone please correct me if it has gone up) allows you to invest up to $2000 each year per child if your house hold income is under $200,000. If funded in a growth-stock mutual fund average 12 percent return when invested long-term, $2000/year (that's about $42/week) over an 18-year span would give you $126,000 for you child's college education!

This is a state plan, but most allow you to use the money at any institution of higher learning in any state. There are several plans within this plan.
1. The "life phase" plan allows the plan administrator to control your money and move it to more conservative investments as the child ages. These perform at around 8 percent because they are very conservative.
2. The "fixed portfolio" plan set a fixed percentage of your investment in a group of mutual funds and locks you in until you need the money. You can't move the money, so if you ge tinto some stinky funds, you're stuck with them. This type may yield better returns, but it gives you less control.
3. The "flexible" plan allows you to move your investment around periodically with a certain family of funds. A family of funds is a brand name of mutual fund. You could pick from virtually any mututal fund in the American Funds Group or Vanguard or Fidelity. You are stuck in one brand, but you can choose the type of fund, the amount in each, and move it around if you want. (This one seems like the best option to me).

We originally started with ESAs for our two oldest children but, since we are still on Baby Step 2 of Dave Ramsey's plan and saving for college is Baby Step 5, we have put that on hold. We are also reconsidering where we want to invest for our children's future. What if our children decide they don't want to go to college? What if our girls want to be stay-at-home-moms? What if our children receive full scholarships to the college of their choice and would prefer to use the money we have saved for their wedding? We don't want to have to pay the fees for pulling that money for uses other than higher education, so we are considering other options, mainly mutual funds. But we have a little bit of time before we need to decide.

If you don't have very much money to set aside for your child's college savings, never fear. There are other options for them such as scholarships, grants, and *gasp* a job. We actually don't plan on paying for all of our children's college tuition. We plan on paying half and having them pay the other half. No loans. Just a job. We will teach them to save their money if they have a job in high school and go to school while working if they choose to go to college. Of all the legacies we plan on passing on to our children, we certainly do NOT plan on passing on the legacy of student loans. UGH!

By the way, I was very excited to see that, according to last week's poll, 1/4 of my readers are already debt-free! Kudos to you!

Links to other parts of this series:
Part 1
Part 2
Part 3
Part 4
Part 5
Part 7

(Many stats and information quoted on this page were taken from Dave Ramsey's book The Total Money Makeover).


Dash of Sass said...

We do custodial accounts for our kids. (I know, I am on the Dave Ramsey plan too, but I do this step ahead anyway!). The reason I do custodial accounts is because I don't know if my children will go to college either, but with custodial accounts you can transfer them to 529 plans later if you want to. I have my custodial accounts with American Funds. I do love American Funds, particularly Growth Fund of America. We put $100 each per quarter per child. I also have set up accounts for my neice and nephew that I put $50 into for birthday's and Christmas (Yes, I am that aunt who gives you mutual funds for your birthday). They will thank me someday! I used to work at an investment firm so after exhausting research have found this to be the best option for our family!

FLUUD7 said...

Although I very much prefer the ESA to a 529, this is an interesting option that I had not considered. Perhaps I will have to research that later when we get to that step. Thanks for your input!