We know that saving for Retirement is necessary, but what if you also have kids and want to start planning for their college education? Saving for the future, both college and retirement can be a challenge, but according to financial advisors, there are three key steps to tackle both!
Step 1: Fund your employee retirement account first
- Fund your plan enough to get the full employer match. This is a “must do,” unless you don’t like free money.
- Put leftover cash toward college. A dedicated bank savings account is good; a 529 savings plan is better.
- Increase retirement savings with income bumps. As you receive raises, funnel the extra cash toward your employer's retirement plan. Experts recommend saving at least 10% to 15% of your income for retirement.
Step 2: Open a 529 college savings plan
529 savings plans are investment accounts that provide tax-free growth and withdrawals for qualified education expenses.
It has been suggested that parents should start to save for the future with a 529 fund as soon as a child is born and add monthly deposits to take advantage of years of compound interest.
Money invested in a 529 plan can grow with the market. Bank savings accounts, on the other hand, often earn less than 1% interest each year. Another potential advantage: Some states give tax breaks for 529 plan contributions.
To build 529 savings:
- Ask family members and friends to contribute. Suggest that instead of buying your child presents, they give money toward your child’s 529 plan.
- Dedicate spare cash to college savings. As your children outgrow clothes or toys, put these items in garage sales or sell them online and add the proceeds to their college funds.
- Earmark half of allowances for college. This is especially helpful as children get older, to create an awareness of their responsibility for their education.
A good alternative to a 529 plan for some investors may be a Roth IRA, which allows early withdrawal for qualified expenses like tuition, but has an annual contribution limit of $5,500 ($6,500 if you are 50 or older).
Step 3: Plan a college-savings strategy with your kids
When your children get closer to high school, include them in discussions about savings and set expectations about how much you can afford to contribute.
As you and your children plan to pay for college:
- Apply for financial aid. Prepare the Free Application for Federal Student Aid, or FAFSA. Deadlines to qualify for aid may vary by state or college — so the earlier you apply, the better.
- Fund only a portion of your kid’s education. Plan on paying only 75%, 50% or even 25% of your children’s total tuition cost, depending on your financial situation.
- Suggest community college first. Attending community college for a couple of years is a low-cost way to build savings (and grade point average) before your child transfers to a public or private university.
- Put a GPA requirement on your contributions. Agree to a sliding scale of funds based on your kid’s academic performance and your budget.
- Target academic and athletic scholarships. Your child’s college might offer them, as well as local community groups, companies and others.
Just like saving for retirement, planning for your child's education can be daunting but both are extremely important to do! These are just a few suggestions we found helpful to save for the future. It's never to late to start planning and saving for your future and your child's education. You got this. As always, Flagship Bank is here for you to help with any questions you may have.