Let’s take a few min­utes today to dis­cuss one of the great­est bud­get­ing tasks fac­ing fam­i­lies across the world today.  Often col­lege and retire­ment occur all to close to one anoth­er for many peo­ple.  Over the last fifty years more col­lege edu­cat­ed peo­ple have entered the work­force than ever before, mak­ing high­er edu­ca­tion an even big­ger ingre­di­ent to a suc­cess­ful future lifestyle.

Many fam­i­lies today will tell you they have lit­tle or no fund­ing set aside for their retire­ment, let alone children’s edu­ca­tion.  A good num­ber of these peo­ple have the resources to save, how­ev­er the task is so daunt­ing they claim defeat before even start­ing.  A state uni­ver­si­ty in the Unit­ed States such as the Uni­ver­si­ty of Ken­tucky could cost upwards of $35,000 USD per year for tuition, room, and board in 2025 assum­ing a con­ser­v­a­tive 6% infla­tion rate.  How many of you paid less that that for your first home?  While the sit­u­a­tion is indeed fright­en­ing, an ear­ly start and the right research will help make your children’s dreams a real­i­ty and not total­ly derail your finan­cial future.

Many fam­i­lies will have to choose between sav­ings for col­lege and sav­ing for retire­ment.  It is a choice they make and there are no con­crete right or wrong answers.  Will you delay retire­ment to pay for your child?  Should your child have to pay all or some of their own way for you to retire on time?  That choice is per­son­al, and val­ues dif­fer every­where.  Begin your approach with this con­ver­sa­tion.

There are numer­ous sav­ings vehi­cles that can be used to save for high­er edu­ca­tion.  Select­ing the right option for you is impor­tant, but not near­ly as impor­tant as sim­ply get­ting start­ed.  Bor­row­ing mon­ey for col­lege can make the entire expe­ri­ence cost over twice as much as sav­ing ahead of time.  Stop pro­cras­ti­nat­ing and set some­thing aside.  When this first step has been made, you are com­mit­ted enough to begin explor­ing your options.

1)     Col­lege Sav­ings Plans – These are ter­rif­ic in that coun­tries often allow such plan to accu­mu­late large sums of mon­ey, and often growth is tax-free (some­times restrict­ed to cer­tain lev­els) when used for high­er edu­ca­tion.  Down­side fac­tors are that if the child choos­es not to go to col­lege, you will pay tax­es and penal­ties.

2)     Children’s Sav­ings Accounts – These accounts which are for chil­dren, yet usu­al­ly con­trolled by a par­ent or guardian have few restric­tions besides the fact that at some age, often age 18 or 21 it becomes the child’s mon­ey.  The ben­e­fits over sav­ing in your name may be hav­ing this mon­ey taxed at the child’s rate.  How­ev­er, that ben­e­fit might be out weighed when Junior decides on a Corvette in lieu of Har­vard or Uni­ver­si­ty Col­lege Lon­don.

3)     Mom & Dad’s Mon­ey – This method­ol­o­gy assumes you save the mon­ey unre­strict­ed in your name to keep full con­trol, and sim­ply deal with the tax impli­ca­tions.

Mak­ing the prop­er deci­sion here depends on four fac­tors:

       1) How much mon­ey do you make?

       2) How much mon­ey do you have?

       3) How well do you know your chil­dren?

       4) How impor­tant is col­lege sav­ings vs. your own retire­ment.

If you can answer at least a few of these ques­tions you can arrive at a con­clu­sion.  For instance a fam­i­ly with a young child might uti­lize a child’s sav­ings account for the first few years.  Once they begin to know their stu­dent and their income they can decide whether to con­tin­ue this approach or begin using a more restric­tive sav­ings vehi­cle.  Just take a few min­utes to match your life with the options avail­able to you where you live.  The right deci­sion could make your sav­ings plan very pros­per­ous.

If you live in a coun­try where the gov­ern­ment offers finan­cial aid or school’s offer schol­ar­ships, be sure to cal­cu­late what you might be expect­ed to pay.   Under­stand that doing this ear­ly will only give you an esti­mate based on your pro­jec­tions, but it will help you under­stand just what your lia­bil­i­ty may be.   In the Unit­ed States this is called the Expect­ed Fam­i­ly Con­tri­bu­tion (EFC).  Know­ing how much you are expect­ed to pay will often influ­ence how much you save.

Of course this is all in addi­tion to your retire­ment sav­ings.  Many coun­tries offer retire­ment pro­grams with tax ben­e­fits sim­i­lar to col­lege plans.  This usu­al­ly takes less analy­sis because while col­lege is a pos­si­bil­i­ty, it is near­ly a cer­tain­ty that you will retire at some point.

In both instances, it is impor­tant to man­age the way you invest.  The longer your time hori­zon, the more risk you can usu­al­ly take in order to achieve your upside poten­tial.  Be mind­ful, that you will like­ly want to take less risk with your col­lege sav­ings soon­er than you might take less risk with your retire­ment sav­ings. (Assum­ing col­lege comes before retire­ment).  The last thing you want is a sig­nif­i­cant expo­sure to stock invest­ments and a cor­rec­tion in glob­al mar­kets right when its time for your child to head off to the uni­ver­si­ty.

Use this oppor­tu­ni­ty not as a time to get dis­cour­aged, but a time to get pre­pared.  Whether your chil­dren or per­haps even grand­chil­dren are 16 months old or 16 years old the time to save was yes­ter­day.  Take the infor­ma­tion you have, build a bud­get, and start sav­ing for both high­er edu­ca­tion and your retire­ment.  Get­ting the finances under con­trol and on track now will help ensure that come Fresh­man year your wor­ries are about Parent’s Week­end and what your child does with­out a cur­few, not about mak­ing the tuition pay­ment and derail­ing your retire­ment dreams.

Relat­ed Posts:

Increas­es in Col­lege Costs for 2012/2013 Con­tin­ue to Out­pace Infla­tion

5 Rea­sons Not to Co-Sign a Per­son­al Loan

The 5 Most Valu­able Mon­ey Lessons for Kids