I received a question recently from listeners who are new parents. They wanted to know how to best invest and save for their child’s education. Excellent question! In this episode, I break down my best tips and questions about saving and investing for higher education for your kiddo. Don’t miss it!
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The #1 Financial Move To Pay For Your Child’s College Education
Know my book is not done yet, however, it’s really close. I’m so excited to release it. It’s the Six-Figure Earners Guide to a Multimillion-Dollar Portfolio. I’ve been working in isolation for three months on this project and I can’t wait to put it out there. Get some feedback and see how it helps you guys out. I hope you guys pick up a copy of the book. It will be a digital version to start and it’s only going to be $4.95. Don’t let the cost dissuade you from the value of the book. There’s $100,000 worth of value that you’re going to get out of this book.
At any rate, this episode is to answer a question that came into the mailbag, a direct message on Instagram, Telegram, or whatever. This is great because when you guys send in questions, it gives me great ideas for content. It lets me stay relevant to what you guys are wanting to know in terms of building wealth and personal finance. This is a mix between a personal finance question and a wealth-building conversation and then taking care of the next generation all in one.
Saving For College
The question is we’ve had a baby and we want to know what plan or what should we do to start saving for college. What makes the most sense? There is a lot to unpack here that’s why it’s a full-show episode. I thought it was just going to be an answer to ten questions that I have that I’ve received but once I went through all the dynamics and decisions that need to be made regarding this, it’s a lot more than setting up a specific plan.
I am going to give you an actionable suggestion that is going to serve you down the road. Let’s look at the numbers here. The numbers are pretty staggering in terms of college costs. In 2017, the US Department of Ag released a report stating that the average cost of raising a child from birth to age seventeen was $233,000. Those little turds are fucking expensive, aren’t they?
That was a few years ago so it’s even more expensive now. Lots of things have gone up and certainly, the college has gone up as well. This number, though, does not include the highest cost, which would be sending your child to college. According to EducationData.org, the average total cost of four years of tuition fees and room and board was $122,000 during the 2019-2020 academic year. College increases your overall cost of raising a child by 52%.
Paying for college is an important goal for many parents. If this is crucial for you, then you’ve got to think about how you want to do it. I would love for your little Johnny to get a free ride through college due to his incredible talents as I would, my little Johnny. I have a John. You’re not going to be able to count on that. You won’t have any degree of certainty about the scholarship until the final year or maybe the final two years of high school, depending on if you’re lucky, but in all reality, you’re not going to know until they’re about to graduate.
By that point, it is too late for you to catch up on savings. The only assured way to pay for college is through obviously saving up and planning ahead. You have eighteen years from the time they’re born to put away the money. This is very easy to procrastinate. This long period of time is deceiving and it can lull you into complacency causing you to put off saving. You’re like, “I got eighteen years. I’ll tackle that tomorrow or next year.”
I can tell you from my own experience, my boys are turning 12 and 14 this spring break of 2022. That means my son, the oldest is 4 years away from going to college and the other one is 6 years away. That’s coming pretty quickly and it’s happened so much faster than I could even possibly explain or imagine that it would happen. What’s the goal to save up to be able to pay for college? There are so many it depends on answers that have to do with this. There are a lot of things that we need to take a look at here.
Your Savings Goal
I recommend you take advantage of the power of compounding. The earlier that you begin to save for school, the less money you’re going to need to put away. If you want to pay for college for your children, I would recommend saving up to 70%, not trying to save the full amount. There are reasons for this that I’m going to dive into, but your savings endeavor or goal is most easily accomplished when you spread it out over the first 17 or 18 years of the child’s life.
Take advantage of the power of compounding. The earlier you begin to save for school, the less money you will need to put away. Click To TweetYou want to have a big chunk of this taken care of, but you don’t necessarily need to have all of it. Let’s say you saved 70%. You’ll likely not feel severe financial impact or pain for the remaining 30%. At that point too, you’re going to be in stronger earning power years of your life. That’s another consideration as well. In all reality, if you’re working on yourself, increasing your skills, you’re working hard on your business, growing your business, or advancing in your job, then you are going to be earning higher income later on.
When they’re going through college, another thing to consider is that although the cost of college is going to be high, you’re not going to be having as many of the expenses that you incur from raising them right now. Think about all the extracurriculars like sports and all the extra things that you do for them right now. Those costs aren’t going to be as high most likely. It depends on how spoiled your kids are.
Let’s take a look at some things that you want to consider here in terms of saving up. First off, your child does not have to go to an expensive four-year college. You are the parent. You decide what’s financially appropriate for you and your family and not your seventeen-year-old. They don’t know any better unless you help them.
Understanding The Consequences
It’s your responsibility to help them understand the consequences of their decisions. Besides attending an in-state school, another way to significantly save money is to have your child attend a 2-year college or a local community college for the first 2 years and then transfer to a private 4-year college for the remaining 2 years. Your child graduates with a fancy degree at half the cost. That’s an option.
I can tell you personally, if my children decide, “I want to go to an out-of-state school,” they have no thought of how much it’s costing to do that. The difference between going out-of-state and in-state is pretty significant, then they can cover that difference. I’m not willing to pay for them to go to an out-of-state school when it’s going to be that much more. There’s not that much more of an advantage or probably any advantage to them in their future by going to an out-of-state school.
Paying For College Education: There’s not that much more of an advantage or probably any advantage to them in their future by going to an out-of-state school.
Your child may not want to go to school at all. That is the second consideration. They may want to start a business or go into a trade like being a plumber or an electrician. You have no way to know this when your child is young. I wanted to be a professional baseball player when I was 3, 4, 5, or 8 years old. Sooner or later, the reality hit that I had not enough talent to do that. I guess I’ll fall back on college.
Number three, you do not have to fully fund your child’s education. I want to probably say this again. It may even be in their best interest to have some skin in the game. They’ll be less likely to cut classes and slack off. I can tell you this from a personal standpoint. This is very true. My grandfather was pretty well-off. He paid for my entire college for four years all the way through private education.
During that time, I didn’t realize or didn’t have the perspective to understand how blessed I truly was. It was an amazing gift and I did absolutely appreciate it, but I don’t think that I valued it as much as I could. In my senior year, there was one class that I skipped for six straight weeks. I never even went. If I were paying for that part of that college myself, do you think I’m going to skip class for six weeks? That wasn’t a routine for all my classes, but by my senior year, I’m like, “I’m checking out. I’m done. This is getting old. I want to graduate and get out of here.” I do think it’s important for them to at least spend a little bit of the money that they need to go.
I can say that having that advantage of my education paid for putting me in a nice position coming out of college. Even though I didn’t utilize that degree to get a job or anything like that, I already had a business that I worked all the way through college and I went into it full-time when I graduated. It still was a blessing to have the experience of going to college. I had an amazing time. I wouldn’t trade it for the world. I’m so glad that I had the opportunity to do it. I want to give my kids the chance to do it themselves. However, I am a little bit torn because I do think college is a bit of a rip-off. The amount that kids are having to pay to be able to go to college and you’re giving up four years of being able to earn money.
Not only that. You have the opportunity cost of the lost wages that you’re not earning because you’re in school but on top of that, you’re spending the money on college for a kid that’s not sure what he wants to do with his life. He goes to college for four years. He spends $120,000 and then on top of that, he gave up $160,000 in earning power. Let’s say reasonably a $40,000 a year wage. Surely, he could have gotten that or better or that type of job right out of high school earning that kind of money.
The Student Loan Bubble
That’s a $280,000 setback from going to school for four years. If you’re not sure or your kid is not sure about what they want to do with their life, then aimlessly going into college to try to then figure it out is causing a lot of problems. In all reality, that’s created the student loan bubble that we’re in now. Kids feel that their only option is to go to college and spend the money in order to have that on their resumes.
They graduate with this huge debt loan that is very difficult to pay off. I know from talking to a lot of you, that student loans are a concern. You don’t know what to do with them either. That’s a conversation that I can answer quickly. Pay the minimum payments and spread those suckers out as long as you possibly can because that’s a low-interest debt and usually they’re around what 2% or 3% interest that you pay on student loan debt. Let that ride if you guys can invest and make money that outpaces that interest rate. That’s all about opportunity costs as I’ve explained on a previous episode.
If you have the ability to generate a 10% return on your investments, the opportunity cost of paying off the student loans early is 7%. The 10% that you can’t earn on that money but the 3% that you save by paying them down, that’s 7% opportunity costs that you’re losing out on. Those are my thoughts on student loan debt. Point four, education is changing. More and more courses in schools are going online. There are new programs available for those that want to study specific topics.
Make It Happen
The world could be an entirely different place by the time your child is ready for college. Finally, if your child’s education is the absolute priority for you, then you must make it happen. Nobody else is going to do this. It’s up to you to get this started right now. I often hear parents say that they want to pay for school and that’s important to them, but their actions dictate otherwise. I see your lips moving, but I can’t make out what you’re saying.
If your child's education is your absolute priority, then you must make it happen. Nobody else is going to do it. Click To TweetThe 529 Plan
If this is your dream for your child, go for it, muster the energy, and get this into action. Like anything, this is going to be so much easier for you to do if you put it on autopilot. You’re going to set up the plan and then fund it automatically every month. That’s what’s going to keep you on track. What is it that you should be looking at? What account or plan to set up in order to maximize your child’s education expenses? The plan that I recommend is called a 529(c). This is essentially a trust for the benefit of your child.
You can contribute up to the annual gift tax exclusion amount in these accounts without any tax consequences. As of right now, the annual gift tax exclusion is $15,000. Anything you give in excess of $15,000 is generally taxable. The 529 plan which gets its name from Section 529 of the Internal Revenue Code allows you to save and invest specifically for higher education. If the funds are used for higher education, then you can typically take a tax deduction when you contribute. On the way in, the funds will be able to grow tax-free.
You can put these funds into say an index fund. That’s what I’m doing and that’s what I would recommend that you do as well. It’s a very safe way to be able to consistently grow your funds at a 7% to 10% type rate of return average annually. What’s interesting too, is that some states allow tax deductions for the contributions that go into the accounts. That’s what I mean by when you contribute or you put the money in, there are 30 states as of right now that allow you to get a tax deduction or tax credit for your contributions into these accounts.
That is the beauty of deduction on the way in and on the way out when you spend it. Another benefit of a 529(c) is that you can give $75,000 in one year as long as you don’t make another contribution to the same beneficiary or same child within the next five years. Assuming that you have the money to contribute, you place it in the trust early, that’s preferable because it will have more time to grow through the power of compounding.
You can put that $75,000 into an account for your six-month-old. If it grows at 8%, 17 or 18 years later, you’re going to have $277,000 for their education. You can also change the beneficiary, but you have to set up a beneficiary when you set up the plan. You can change it later on. If you have more kids or one of them decides, “I don’t want to go to college.” You can change the beneficiaries at any point and it’s not that difficult to do it.
Here’s the kicker that’s important and this is why you want to be careful about how much you put into these plans. You cannot use 529 plan funds for anything other than education. If your child goes to a less expensive school or ends up not going to college at all, then you may find that you have over-contributed to the 529 accounts. Taking funds out of a 529 and not using them for college comes with a hefty 10% penalty. This is why I never recommend that you would use a 529 plan to save all the funds that you’ve earmarked for the school. Again, you cannot use these for anything other than school. If your child decides they want to start a business, you’re going to owe penalties on those funds.
Paying For College Education: You cannot use a 529 plan fund for anything other than education. If your child goes to a less expensive school or ends up not going to college at all, you may find that you have over-contributed to the 529 account.
Let’s give you some other things that you should consider about these plans. One thing to keep in mind, your money is going to be growing and compounding inside of these plans, but maybe not at the same rate. The cost of college is going up probably just as fast as your funds are compounding. It’s going to be difficult for the growth of your funds to outpace the increasing cost of college by that wide of a margin. Maybe not at all. You want to be doing this right now just to keep pace with the increasing cost of college.
Here are some things that you need to know in addition. The 529 account funds, you can invest them. It’s not just a savings vehicle, you can invest them into an index fund or there are several options that you can invest these funds into to get them to grow at a faster pace than a 0.05% or 0.01% savings account. However, that means that they also can shrink. If the market should drop now, if we’re taking this on over an eighteen-year time horizon, in all likelihood, you’re going to be able to overcome any of the market drops, corrections crashes or anything like that. Typically, the market over an eighteen-year period has not.
If we look back at any window of 18 years over the last 100,000 of stock market history, it’s very rare that your funds did not grow over an eighteen-year period. The only time was probably during the great depression. The earlier that you invest, I’m going to keep saying that the better. One thing that’s important. Let’s say you put $100,000 in over the course of eighteen years. That’s how much you put into this 529 but that’s how much you’ve contributed.
Let’s say your investments have grown to $300,000. They’ve gone up $200,000 with growth. When you go to pay for college, you do not have to pay taxes on that growth. That’s an incredible advantage, you guys. This right here and that right there are solved in 529(c). It’s worth taking it on. The rules also for spending 529 funds are loosening up too, which is great.
They allow you to use the money for everything from tuition to paying for a student’s internet access. The Secure Act, which became law in 2019, relaxed the rules on how you can use the money in a 529 plan. It even allows you to be able to use leftover money that’s in the 529(c) to repay up to $10,000 of your student loans.
It also lets the borrowers apply for money from their 529 plan to pay for homeschooling expenses and apprenticeships as well as private primary and secondary education. That gives you more flexibility on what you can do. This is important. There are no federal 529 plan tax deductions. What this means is that you don’t get a deduction off your federal income taxes from a 529 tax advantage account. The only thing you get is the state deductions.
There are states like Florida or Texas that don’t have a state income tax. There’s going to be not too much advantage for this type of plan because you don’t pay any state income tax burden. Something to consider as well is what state you’re in. You got to look at the different tax ramifications based on the State.
In other words, it means that you can’t lower a tax burden that you don’t have. What are some other considerations? You want to hunt for 529 tax deductions but plan for the contribution limits. As you choose your 529 plan, you want to pay attention to the contribution limits. According to the IRS, contributions cannot be more than the amount needed to provide for the student’s qualified educational expenses. No matter what the ways that you plan to help your child cover college costs, educational tax deductions and credits can make a big difference.
This is why because there are so many unknowns of the future, what college costs are going to be, or does your kid want to go to college. What college are they going to go to? This is why I say don’t put all the money that you project that you’re going to need into this 529. It’s because if you go over and you don’t spend it on their education, there is no other option for you to get those funds out of there besides taking that 10% penalty.
The Best Education
I hope this episode helps you guys. To wrap it all up, your convictions, behaviors, and results regarding money are going to impact how you make every financial decision. Your children are going to learn by your example. The best education that you can give them is one of a balanced household where both you and your spouse understand the value of money and how you can use it to improve your quality of life.
Your convictions and behaviors regarding money will impact how you make every financial decision. Click To TweetIf your children are acting irresponsibly, they’re going to do what you do, not what you say. They’re going to notice this and develop their money scripts based on yours. Create a vision of the foundation you wish you’d had with money and your relationship to it. You have an opportunity to create something similar for your children in your own style. I know that I absolutely replicated a lot of the money patterns of my parents. Thankfully, they modeled me exceptional money habits.
They were different. My mom loved to do remodels and projects at home so she would love to spend money and enjoy it. My father was very good about being frugal, saving, investing, and very careful. I got the best of both worlds. I got to see how to live in the moment now while at the same time, being fiscally responsible. That’s what was modeled for me and that’s why I did it from an early age myself.
What kind of role model do you want to be for your kids? That’s the big question. Creating these great financial habits now is going to do more for your children than anything that you can ever tell them or any college that you can ever send them to. What are you modeling and showing with your own behaviors? That’s the biggest key to teaching your children how to live a successful financial life. I hope this helps you guys. You’re probably going to need to do some additional research to go and set these plans up, but I feel it’s going to give you a good head start.
Paying For College Education: Creating these great financial habits today is going to do more for your children than anything you can ever tell them or any college you can ever send them to.
I would absolutely be 100% hands down if you think that your children will go to college. If that’s your plan for them, then I would start as early as humanly possible on a 529(c) and start funding it right away. How much should you do? That’s a great question. A lot of that depends on what is it that you anticipate. What do you anticipate for your children in terms of where they’re going to go to school and how much you’d be willing to spend for them?
If you’re putting away $300 to $500 per month for your child starting out when they are at age 1, 2, or 3 years or whatever, you’re doing a huge service to your child. I don’t feel like you need to do too much more than that. The kids have lots of options. They’re going to be able to figure it out and be able to potentially get a scholarship like an athletic scholarship or academic. They’re going to be able to do community college for a couple of years to save costs and/or take out student loans.
You don’t have to feel the pressure or the responsibility that it’s all on your shoulders. There are many parents out there that don’t do anything for their children’s education. They don’t pay anything and they’re not wrong. That’s okay. There’s nothing wrong with putting the full bearing of the responsibility on your children to pay for their own college. You don’t need to feel guilt over not doing anything. It comes down to how is it that you want your children to have a leg up when they get to that point.
I can tell you, from my own personal experience of having my college paid for, it gave me a huge leg up. It was a huge release of financial pressure and burden on me and I’m very grateful for that. I might not have been that grateful for it at that time, but over the course of maturing, I’ve realized how blessed I was. There’s so much gratitude that I have for my grandfather. Even though he’s passed away, I constantly thank him for being that generous to do that for me. I hope this helps. You guys can reconsider some thoughts or beliefs you have about your kids and their futures. Have a great day. Here we go. I’ll see you on the next episode of the show.
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That’s a wrap for this episode. If you’d like to dive deeper into your own wealth-building strategy, check us out at MyIndestructibleWealth.com and follow along on LinkedIn, Facebook, Instagram, and yes, even TikTok. Send me your questions and your financial challenges and I promise I’ll respond. Also, I’ll think you’re awesome if you’ll share and leave me a five-star rating and review on Apple Podcasts. Until next time. Remember, our mission here is to help you make, keep, and grow wealth that you can enjoy now and for years to come.
Important Links
- EducationData.org
- LinkedIn – Jack Gibson
- Facebook – Indestructible Wealth
- Instagram – Indestructible Wealth
- TikTok – Indestructible Wealth
- Apple Podcasts – Indestructible Wealth with Jack Gibson
