By Brian Plain, lifestyle financial planner at Brian Plain, CFP®
As a parent, the desire to take care of your children trumps pretty much everything else. And that’s a good thing, except when it comes to saving for college. Allow me to explain.
You need to take care of yourself before saving for college for your children.
So what does that mean?
It means you need to pay off any credit card or high interest debt (outside of your mortgage) first. It means you need to have an emergency fund consisting of at least one to three months’ worth of living expenses in cash held in a savings account. It also means you need to be saving and investing between 10% to 20% of your income towards your retirement.
Once you have all of those boxes checked, then you’re ready to start saving for college.
But what if you’re not planning to retire for another 20 or 30 years and your kids will be going to college well before that?
My advice remains the same and here’s why:
Loans are available for college. Loans are not available for retirement.
If you’re able to check all of the boxes above and have enough left over to also save for college while maintaining a decent lifestyle, that’s great. If you can’t, it’s even more important to focus on checking the boxes above before focusing on college savings.
Saving for college at the expense of getting your own financial house in order can have a serious impact on your future well-being. You are essentially betting on your kids doing well enough to be able to support you financially in your retirement. Something tells me this is probably not your intention.
Let me be clear – I’m not saying don’t bother saving for college. Saving for college is very important. Just make sure you have your financial house in order before you start doing so.
Are you truly ready to save for college? Let’s begin.
When you are ready to start saving for college, consider using a 529 college savings plan. A 529 plan is an education savings plan specifically designed to help families set aside funds for future college costs.
One of the major benefits of using a 529 plan are the available tax benefits. While contributions to a 529 plan are not deductible on your federal tax return, your investments grow tax-deferred, much like an IRA or 401k, and if you use the distributions from the account to pay for the beneficiary’s qualified education expenses, those withdrawals are then free from federal tax.
If you are an Illinois resident and you contribute to an Illinois 529 plan, you’re able to deduct contributions of up to $10,000 if you’re single and up to $20,000 a year if you are married and file jointly from your state taxable income.
Ready to get started and are looking for an Illinois 529 plan that you can set up yourself?
One option is to check out www.brightstartsavings.com. This is a direct-to-consumer 529 plan, meaning you don’t need a financial advisor to set one up. With some basic information, you can get an account setup online in about 15 minutes and start contributing to your newly established 529 college savings plan right away.
Given the current cost of college, I’d encourage you to start saving early and to do so often, just remember to have your own financial house in order first.
Brian Plain is a lifestyle financial planner at Brian Plain, CFP®, www.brianplain.com. Investment advisory services offered through Gradient Advisors, LLC (Arden Hills, MN 877‐885‐0508), a SEC Registered Investment Advisor. Gradient Advisors, LLC, and its advisors do not render tax, legal, or accounting advice.
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