For families with young children, saving for college shouldn’t be an option. It is a must if you want to avoid large college debt that will eat into your retirement. Parents should ask themselves, “How old will I be when my youngest child graduates from college? How many years from then do I want to retire?” Can I afford both?
The answer is YES, if you start saving now for both college and retirement. You will be able to retire comfortably and have college fully paid for if you save 10% of what you earn – from every paycheck without fail. That means staying out of credit card debt. When you pay as you go, you are paying yourself because you aren’t paying interest on consumer debt to someone else.
Time is your greatest ally. The sooner you save, the more time your dollars have to work for you. This little ditty carries a powerful truth:
Money makes money.
And the money makes more money.
And you can’t make the money your money can make for you.
The sooner you start saving, the fewer dollars you have to save because your money will grow for you. That is the power of compounding.
First, decide that you are going to save. Then decide on the amount. In the beginning, it is important to just save. Set an achievable saving’s target, come as close to 10% of your net salary as possible. Make the deposit in your retirement, savings or investment account before you spend any other money.
As your first step, maximize the amount, you contribute to your retirement accounts. Salaried employees should enroll in their company’s retirement plan as soon as possible and begin contributing at least the amount matched by the employer. Increase this amount by 1% every six months AND by 2% whenever you get a raise. If you are self-employed, establish a retirement plan such as a SEP-IRA or SIMPLE plan, and increase your contributions until you reach the maximum.
Once you have an emergency nest egg and some investments in your own name, then it is time to consider saving money, specifically for college. At this point, become knowledgeable about the federal financial aids. Check out web sites and find a calculator for your Expected Family Contribution (EFC). This is the amount you are expected to contribute for one child for each year of college. For example, if you have two children, multiply your EFC by 8 to determine the total amount you will be expected to pay as a minimum.
The various college savings’ options should be weighed against how each impacts a family’s financial-aid eligibility. Then consider who controls the money beginning at age 18. Is it the parent or the child? Accounts opened in a child’s name are custodial accounts (UTMA or UGMA accounts) that become your children at 18. Then, your child may decide to buy the latest and greatest car instead of spending the money for college.
The new 529 College Savings Plans offer many advantages for college savings. The money grows tax-deferred until the child goes to college and is taxed at the child’s income rate when withdrawn to pay qualified college costs. The account owner retains control of the money, and decides when it will be withdrawn. And if circumstances arise whereby the account owner needs the money back, they may pay a penalty and have the money back. These plans offer estate benefits that grandparents may want to use.
If you have not already found a financial professional with expertise in college funding, find one when your child is a freshman in high school, and get assistance in determining all the options you have for paying for college. You will have your savings, student loans, parent loans, and maybe gifts from grandparents. There are education-focused tax strategies to consider. Will your child have a job during high school? Understand how you plan to pay for college by the end of your child’s sophomore year, and then devote yourself to the selection and admissions process.
Every dollar saved is a dollar you don’t have to pay back. The longer your dollars work for you, the more they will be worth. Saving dollars now and selecting colleges later is a winning combination that will help your family make the college experience a celebration.
Calleigh Queenan currently writes for vacuum cleaner reviews, an online reviews created to share her honest opinions based on hands-on experience on products. Calleigh is a stay at home mom and enjoys offering her tips on Hoover vacuum Reviews.
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