As requested by Luba, we will now delve into the complicated world of college savings. She asked about 529 plans, and is probably interested in an analysis of the different available tax shelters and investment products. We'll get into that, but first we need to discuss when you should be thinking about saving for you child's college education.
The sooner you can start putting money aside to help your children get a higher education, the better; for your children, that is. Certainly, if you plan to pay for the while bill anyway, then it probably also benefits you, but chances are you aren't planning on paying the whole bill by yourself. You also have other future expenses to think about: medical expenses as you get older, retirement, etc.
Here's where I might get a bit controversial: if you can't afford to save as I outlined in Saving and ALSO max out the amount you can put into a retirement tax shelter every year (IRA, 401k), then you have no business saving for your child's college education. Here's why:
-Your kid might not go to college. You will retire (or die, and then the account goes to your next of kin).
-Your child can get scholarships, subsidized loans, and other cheap financing for college. Let me know when you can get that sort of stuff for your expenses when you're 75.
This is like when you're flying and learning about using those oxygen masks: put your mask on first before assisting others. Like many finance decisions, it pays to think about the long-term.
Look for Saving for College Part II later...
Wednesday, July 29, 2009
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Andy- I have a question, which is not really related to the topic above, but...Should you max out saving in your IRA and 401 K before starting to invest in a mutual fund? Thanks, melissa z
ReplyDeleteI have a follow up question to Melissa's, I recently moved my 401K from pre-tax to a Roth, for no other reason than I THINK it might be a good idea. Can you talk about the differences in the two?
ReplyDeleteWe paid for your and your sister's college education out of current income. It meant less savings during that period. We tend not to max out on our budget - such things as having a lower mortgage than we could afford. Your grandparents never had a mortgage. One reason they didn't have many money worries, and gave 10% to charity.
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