Financial Planning for College Involves More than Just Saving Money
Having helped three kids through college myself I can tell you that if you really want to properly prepare for your child's post-secondary education, and insure that the funds you have set aside will be sufficient, you need to help them to discover what they want to do when they grow up.
Why? Because if your child is not certain as what to they want to study to become -- by the time they graduate high school -- you can almost bet that it will take them a year or two longer to get their degree.
College Financial Planning Spoiler: When your child spends 6 years getting a 4-year degree!
Or worse, if your child ends up getting a degree for the wrong reasons (because the field pays well, easiest route to a degree, etc.), you could end up paying tens, even hundreds of thousands of dollars for a degree in a field they end up hating.
College Financial Planning Waster: When your child spends 4 years getting a degree they never use!
Therefore, in order to avoid over-paying for college or paying for a degree that is never used, your college financial planning should include helping your child to develop a clear and meaningful career path.
Help Your Child Discover a Work They Will Enjoy
In my opinion, beyond the normal responsibilities that come with raising children, the next most important thing you can do for them is to help them discover a work they will enjoy -- a work that is well suited to their talents, abilities, genuine interests, values, and personality traits.
This involves paying very close attention to things like ...
- What do they seem naturally good at?
- What do others most appreciate them for?
- What school subjects do they excel at without having to be pushed and prodded?
- What types of problems do they most enjoy solving?
- What types of magazines or books do they read without being forced?
- What do they spend their discretionary money on?
- What extra-curricular activities do they enjoy?
- Do they have a favorite hobby?
And remember, you are trying to help your child discover the service they will most enjoy providing to others, not a career that will make you as the parent happiest or proudest.
Form a Solid "Best Livelihood" Hypothesis, Then Help Them Test It
The goal should be to form a solid hypothesis as to what type of job or business your child would most enjoy by the time they enter their last year of high school -- preferably sooner.
Once a solid hypothesis is reached, the next step is to help them find ways to test that hypothesis in the real world -- without making a long term time or money commitment -- such as after-school jobs, micro-business ventures, or volunteering.
If your initial hypothesis proves inconclusive, form another hypothesis and test that one. Repeat this experimentation process until a satisfactory conclusion is reached.
Suggestions for Indecisive College-Age Students
If it turns out that your child ends up graduating high school without a self-actualizing career path in mind, my advice would be to encourage your child in one of the following directions:
- Enroll in an inexpensive online or local community college so they can work on their general education requirements while they continue their experimentation process.
- If your child is not interested in college, encourage them to learn a specific trade from a nearby vocational school. This is generally the quickest and most inexpensive route to an income level high enough to maintain the financial freedom to continue their experimentation process.
- If your child is not interested in any kind of post-secondary schooling, encourage them to seek out entry-level positions in the type of businesses they believe they would be happy owning themselves. Once they find one they truly enjoy, they can always get the necessary schooling in their free time.
Of course, no matter which direction you choose to encourage, you will always want to sell them on managing their finances in such a way as to preserve the financial freedom to follow their dreams.
The bottom line is that while some children are born with obvious talents and abilities (child prodigies), the majority are born with talents that are obscure and therefore require a process of experimentation in order to ferret them out.
Your goal as a parent should be to assist them with that experimentation process throughout their childhoods, and then encourage them to seek inexpensive ways to experiment in the real world instead of paying $25,000 a year (plus interest) to experiment as an unemployed, full-time college student.
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FAQs
This chart shows that a monthly contribution of $100 will compound more if you start saving earlier, giving the money more time to grow. If you save $100 a month for 18 years, your ending balance could be $35,400. If you save $100 a month for 9 years, your ending balance could be about $13,900.
How much should I put in 529 per child? ›
Here are today's current monthly estimates, according to Kantrowitz: For in-state, four-year, public college: minimum $300 per month. For out-of-state, four-year, public college: minimum $500 per month. For private, non-profit, four-year college: minimum $650 per month.
What is the difference between 529 and college savings plan? ›
A 529 Plan can be invested into ETFs or target date funds which can offer more growth opportunities compared to a lower interest-earning savings account. Unlike a savings account that is not exposed to risk, a 529 plan can lose money since it is tied to investment vehicles.
How to set up a 529 college savings plan? ›
Opening a 529 can be completed in (as little as) these four steps:
- Select a plan. You'll have to choose between a savings plan or a prepaid plan. ...
- Choose a beneficiary. This will likely be your child — but remember, you can change the beneficiary at any time without penalty. ...
- Open the account. ...
- Build your portfolio.
You can keep the money in the 529 account in the case your kid decides to pursue college or a graduate degree in the future. There is no requirement to withdraw funds at the age of 18–the money can remain in the plan indefinitely as long as there is a living beneficiary.
Can I use my child's 529 for myself? ›
You can transfer the funds to another eligible beneficiary, such as another child, a grandchild, yourself or a friend.
Does contributing to a 529 reduce taxable income? ›
Contributions to a 529 plan are not eligible for federal income tax deductions. However, the earnings in a 529 plan grow tax-deferred and are not taxed upon withdrawal when used to pay for qualified education expenses, including college costs.
What happens to 529 when a child turns 21? ›
Money put into children's custodial accounts is an irrevocable gift, and transferring it to a 529 account won't change that fact. The money can never be shifted to another beneficiary, for example, and your child will control it when they reach the age of majority, either 18 or 21, depending on state law.
What happens to unused 529 funds? ›
Beginning in 2024, you can transfer unused funds in a 529 plan to a Roth IRA for the same beneficiary, without tax or penalties. These rollovers are subject to several rules and limits: Transfers have a lifetime maximum of $35,000 per beneficiary. The 529 plan must have existed for at least 15 years.
What are the disadvantages of the 529 plan? ›
If you use distributions from your 529 account to cover anything other than education costs, you will face a penalty. You will be able to withdraw your money from the account but will be responsible for income taxes on the earnings – federal, state, and county if applicable – as well as a 10% penalty fee.
A 529 savings plan is generally an all-around good choice to pay for your child's (or your own) college, while a Roth IRA may be a better option as a backup account to supplement educational expenses.
What is the main disadvantage of a 529 prepaid tuition plan compared to a 529 savings plan? ›
Prepaid plans are not available for K–12 education. As with 529 savings plans, prepaid tuition plans grow in value over time. Eventual withdrawals from the account used to pay tuition are not taxable. However, unlike savings plans, prepaid tuition plans do not cover the costs of room and board.
What is the best age to start a 529 plan? ›
Short answer: The earlier, the better ...
This is the magic of compounding—when your returns earn more returns and so on. You can open a 529 and make the most of the time you have as soon as the beneficiary has a Social Security number!
How much does it cost to start a 529 plan? ›
Though there is no federally mandated minimum deposit required to open a state-administered 529 plan, each state has set its own requirements. State minimums range from $0 to as much as $3,000, depending on which plan you choose.
What is the best college fund for a child? ›
Summary: Best 529 College Savings Plan
| Company | Forbes Advisor Rating |
|---|
| New York's 529 College Savings Program – Direct Plan | 5.0 |
| U.Fund College Investing Plan (Massachusetts) | 5.0 |
| UNIQUE College Investing Plan (New Hampshire) | 5.0 |
| Bright Start Direct-Sold College Savings Program (Illinois) | 5.0 |
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In most states, that means age 18, though in some states the age threshold may be higher. The custodian can't change the beneficiary or account owner. Once the account owner/beneficiary becomes an adult, they assume control over the 529 plan.
How much money should an 18 year old have saved for college? ›
How Much to Have Saved by Age
| Age | Low End | High End |
|---|
| 15 | $76,703 | $153,403 |
| 16 | $84,053 | $168,102 |
| 17 | $91,764 | $183,525 |
| 18 | $99,855 | $199,706 |
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Nationwide, 529 Plan savings totaled $450.5 billion in June 2023 for an average account balance of $27,741. The average account balance in mid-2023 was 9.50% lower than the all-time high average balance of $30,652 in 2021.
Is a 529 plan good for wealthy? ›
These plans are attractive for wealthy families because they provide a way for a parent or grandparent to transfer much more money to a child than they would be able to without incurring gift taxes, Stokes says. Here's how he suggests maxing out a 529.
