A growing part of many families’ financial plans is saving for education and their kids’ future savings. Especially with back-to-school season kicking in over the last month or two, it’s natural for parents to think about what their kids’ future may look like, at least financially, over the next few decades. Will they go to college? Will they be an artist or a doctor? Will they be able to get a good job or buy a nice home? Taking the time to build a plan for how you will support your kids’ future is certainly a worthwhile exercise, and it can hopefully calm some of the financial worries you project for your kids.
Key Takeaways
- Saving for your children’s future starts with considering education costs; private K-12 school, trade programs, and college all have increased in cost. Beyond education, many people save for future down payments, weddings, etc.
- Some people fund education savings by breaking it down into monthly savings targets, while others take an asset approach, where they focus on reaching a high target amount as quickly as possible to fund their plan.
- There are several savings vehicles available to fund your kids’ future. A 529 account offers tax advantages for education. UTMA accounts are great for multi-purpose savings, and Trump Accounts help with retirement planning for our kids.
What are you actually trying to pay for?
While I think it comes automatically for some parents, it is noble to focus some portion of your wealth on your kids’ future. After doing so, however, trying to define exactly what that future could look like is an exercise not many people do intuitively. Generally, I hear something similar to “we just want our kids to be set up for success,” or “I don’t want them to have loans.” Other times it sounds more like, “I want them not to have to worry about…” or “they should be able to go to any school they want.” People have ideas about improving their kid’s future, but narrowing their vision could have more benefits than they realize.
Many times, I start the conversation by distinguishing between saving for education and saving for everything else. College costs have skyrocketed over the last few decades, and many students struggle to get into a reputable university without some sort of outside assistance. That could be anything from grants or scholarships to loans or support from parents and/or grandparents. As a result, many parents feel the need, rightly so, to begin preparing years in advance for this support. Each situation is inevitably different. Some people have the funds to cash-flow college expenses, while others plan years or decades ahead to fund them.
But education savings no longer has to be limited strictly to college. Many private high schools now cost nearly as much as college, so you may need even more savings in advance. Certifications, graduate school, trade school, and other options are also becoming more and more common. The goal isn’t to know exactly what your 2-year-old will do in two decades, but to think through whether any “expensive” education will be included. Chances are it probably will.
Beyond saving for education, many people tell me they don’t want the money they set aside to be “solely for education”. They want to save so their kids could put a down payment on a home, buy a car, start a business, travel, or even for a wedding. Any expense worth saving for can fit into this category, and it is well worth saving for beforehand. Saving for your kid’s future does not have to be all or nothing. Some can be for education, and some cannot, and that is okay.
How much should you save?
After deciding what you want to save for, the main question is how much. For clarity, I’ll focus on paying for college, but the same framework applies to any expenses you want to save for. Start by asking how much of college you actually want to cover. All of it? Half? Tuition but not room and board? How much to put away today will vary widely depending on your answer.
If clients don’t have an idea of how much, we generally start with a guess of $25,000 per year for college. That’s roughly the going rate for a year at the University of Louisville or the University of Kentucky. Assuming the student goes for 4 years, that is roughly $100,000 that must be covered while your kid is at school. Paying $100,000 over 4 years (ignoring a second or third kid behind the first one) can create a serious gap for families to cover, even for a “normal” college experience.
There are two schools of thought when it comes to tackling these education plans. The first is more of an asset approach, where the goal is to reach a certain amount as fast as possible to fund the plan. Some people will say, “Let me move $40,000 over to the kid’s account now, and that should fund college when the time comes”. This approach works well if there are assets to move to do this. Otherwise, it may not be feasible for others.
The second approach is more of an income savings approach. Instead of focusing on a dollar amount, the focus is on how much we must save each month to get through college. That could be $200, $500, $1,000 per month depending on your specific situation. This may be easier for families with multiple kids as well, since we can refine how much we save into each account to make sure things “stay fair”, if that is the goal.
Where should the money go?
Ultimately, once you understand what you want to save for and how much you want to save, what account the money goes into should solve itself. I wrote about this earlier this year with the introduction to the new Trump accounts. One of the most popular education accounts to open is a 529 account, which offers tax advantages for education, but it can penalize you if you use it for expenses other than education. UTMA accounts are great for multi-purpose savings. Anyone who falls into the “not exclusively education” camp should look into these. Finally, Trump Accounts have hit the scene to help with retirement planning for our kids.
Saving For the Future
There are many ways to save for our children’s future. Chances are, the major costs in our kids’ lives will only continue to increase, which will magnify the need to plan and prepare to support them. If that is a goal for your kids, try to refine more precisely what that level of support entails. Doing so can help you put real numbers on how much you need to set aside or save each month to get there. Education planning, along with general savings for your kids, could play a major role in your overall financial plan for many years to come. Take the time to seriously consider what their plan looks like, and what it means to you (financially) to help.
