The other day, I (Tony) got an email from a long lost friend of mine that I hadn’t chatted with in years. He knows I’m in the industry and he reached out to me with an email question that I thought our blog readers might find of interest. Turns out, he and his wife had a daughter about a year ago and they were thinking through what type of account would be the best way for them to save for her college education. Below is my abridged reply.
“It’s great to hear your desire of being a good steward of your family and finances. Unfortunately, your question isn’t as easy as one might think. We typically look at a variety of ‘first steps’ that we believe should be in place before beginning to fund a college goal. First, do you have a Will in place? A Will should be developed that would name an Executor of your Estate and your desired caretaker of your kids in the unfortunate event of you and your wife’s death. It would be a travesty to allow the courts to decide who would care for your daughter. You should have a Will fully executed before beginning to fund your college goal. These aren’t outrageously expensive, but they aren’t cheap either. You’ll need to seek and find a qualified attorney to draft a Will for you and your wife.
Next, you should have adequate life insurance in place. In the unfortunate circumstance of your death, you’ll want to leave your wife and daughter adequate income to survive. Future college costs can be worked in to the equation of adequate life insurance amount. Further, if you and your wife should both die at the same time, your chosen care-takers of your daughter will be grateful that money is available to help raise your daughter over the long term.
Third, you should establish and fully fund an Emergency Fund. We recommend 3-6 months of your living expenses to be set aside in this account to be used for emergencies. While saving for your daughter’s college is a noble cause, if you lose your job or some catastrophic event causes you to have a large outlay of cash, you’ll want to make sure your family’s needs are met first for the here and now…in which an Emergency Fund could be used. Once money is in a college savings type account, you will be unable to take the funds back out of it without penalty.
Fourth, it is to your advantage as well to ensure that you and your wife’s retirement is a primary consideration above college contributions. The main reason is that you may put your own retirement at risk by not funding it fully, only to find out your daughter receives a hefty scholarship or perhaps doesn’t even go to college for various reasons. I’ve dealt with too many clients who have put their own retirement in jeopardy to send their kids to college and are now living with regret and having to work for longer than they had ever anticipated.
Next, it is to your advantage to make sure you’ve dealt with any consumer debt that is outstanding. High interest rate student loans, auto loans or credit cards will kill you financially over time. It is recommended that you extinguish most, if not all, consumer debt (not mortgage) before considering funding a child’s college education.
Last, but not leastJ, if these other financial considerations are in order, you could consider college contributions. We typically steer clients to CollegeAmerica which is Virginia’s 529 Plan managed by American Funds. This Plan is only available through advisors. American Funds has a robust line-up of target date offerings and has had stellar performance.
For those living in Ohio and not working with an advisor, consider Ohio’s 529 Plan. www.collegeadvantage.com Choose the Do-It Yourself Direct Plan. You can sign up everything online and do your contributions via EFT from your bank account. Choose an age-based option that will vary in risk as the child gets older. The closer they get to college, the less risk the model will take. Also, Ohio’s plan allows for a small tax credit that many find helpful in tax planning considerations.
For more information of which I pretty much agree with, visit www.daveramsey.com He lays out many of the principles I’ve written above in book form. Also, a lot of times there are live classes in the area in which you can attend. You can search for those and you and your wife can learn more.”
