Are you saving for college? Life is busy. Deciding how to prioritize income and do “all the things” like buy a house, keep an emergency fund, pay for your kids’ college education, save for retirement, and not to mention having a little fun along the way, is challenging.
As we approach the start of the school year many families start to feel the pressure about college funding.
5 Questions to Ask Before Saving for College:
- Do you have debt, other than your mortgage? If the answer is yes, take a look at the kind of debt and how much you owe. If you have high levels of debt (typically more than 8% of your gross income excluding your mortgage) or high-interest unsecured debt (like credit cards), the best option may be to pay down the balances before you begin to save for college.
- Have you built an emergency fund? A general rule of thumb is to have 3-6 months’ worth of expenses in liquid cash (ie: a checking, savings, and other easily accessible accounts) to use in case of an emergency. While this rule of thumb is an industry-standard, also consider circumstances unique to you to determine if this is an adequate level of accessible savings.
- Are you saving for retirement? If so, take a look at your contributions and make sure you are at least taking advantage of an employer match, if that is available. Generally, saving 10-15% of your gross income for retirement, including the employer match, is a good idea. So, if you aren’t meeting this benchmark consider saving more for retirement before saving for college. Remember, you can borrow for college but you can’t for retirement!
- How do you feel about paying for college? Talk with your partner, spouse, or significant other and come up with a philosophy. Talk about what you will pay for, what the student will pay for, funding in-state vs. out-of-state tuition, as well as a public or private institution. After you have determined what you are prepared to pay, you can create a plan to start saving.
- What kind of savings vehicle should be used? If you have gone through the questions above and are now prepared to start saving for college, you have some options to consider. There are many choices when it comes to saving for college including a 529, brokerage, IRA/Roth IRA, UGMA/UTMA, and others. Each of these accounts has different characteristics as it relates to taxes, use of funds, accessibility, who is the owner of the account, impact on future financial aid, and more. Before beginning to save for college be sure to work with a qualified advisor to assess your needs and create a funding strategy that fits your situation.
The cost of college is increasing rapidly. Don’t postpone planning for college expenses only to have them creep up unexpectedly later. If saving for college isn’t possible now, work toward developing a plan and establishing a solid financial foundation. Once you have your safety net in place begin exploring how you can make your financial plan more robust.
About the author, Jeanna Nation
Jeanna and her husband Brian live in Boone, Iowa, with their two active children, Alexa and Logan. They enjoy time outdoors biking, canoeing, kayaking, hiking, and camping. During the day you can find Jeanna at West Financial Advisors, a fee-only wealth management firm located in the vibrant Des Moines East Village. Her passion is to help people grow and protect their wealth throughout all life stages.
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