I tend to focus so much on financial planning and investing from a personal financial freedom standpoint, that I sometimes neglect to touch on the importance of also planning for our kids’ lives.
This week I’m going to dive into this.
Because what good is having more freedom and time to spend with our kids, if their future wellbeing is compromised?
If you’re anything like me, you want your kids’ lives to be better than yours was and is.
When they become a young adult, a strong starting point — with minimal debt and a head start on their life savings — can lead to less stress, greater confidence, and more wealth over time.
However, today, it’s a lot more complicated than simply plowing as much as you can into a college savings plan. The education and career landscapes are changing rapidly.
Which means the financial planning strategy also needs to change.
The future of college costs
Before we can create a saving and investment strategy, we must know how much money we need to accumulate.
This is difficult to project for college costs. It used to be fairly simple: take the average cost of college tuition today and adjust for inflation.
However, today, we are in the early stages of an economic paradigm shift. We are shifting from an analog economy to a digital economy.
Historically, a college degree was a prerequisite for getting a good job and earning a high income. Collectively, we all kind of viewed it as a ticket to an event. The event being our career.
Since a college degree was essentially deemed a necessity by an entire generation, it created significant demand for a degree. And significant demand (not to mention all the government subsidies) meant institutions could charge higher and higher tuition rates.
The world is vastly different today.
Anyone in the world can now learn anything they want on the internet (for free or at a low cost). Heck, even Stanford University and Harvard University offer free online courses.
In addition to formal curriculums being offered online, there are countless experienced professionals sharing their knowledge and insights every day. All of which can be obtained at no cost via YouTube videos, social media posts, newsletters, etc.
In 10-15 years — or whenever your child graduates from high school — they can easily acquire valuable knowledge for free. And figure out how to apply that knowledge in a way that helps people solve problems.
This is the simple-but-not-easy way to start an online business. And if your child can create a personal brand online, there’s no reason they can’t run a successful business.
Now, obviously, entrepreneurship isn’t right for everyone.
But we currently live in a world where employers increasingly don’t care about college degrees. What could we expect this to look like in the next decade or two?
It’s becoming clear that skills and expertise are increasing in value, while college degrees are decreasing in value.
If a person is really smart, has a large social media following (lots of influence), and can help a company make money, they shouldn’t have any problem finding a good-paying job.
And if your child still decides to go the traditional route — the simple fact that millions of kids won’t — should put downward pressure on their college tuition costs.
While nobody knows what college will cost a decade or two from now, I think it’s fairly safe to say it won’t continue inflating at the rate it has been for the past 20 years.
And, as hard as it may be to fathom, the cost might actually come down.
How much should you save for college?
There’s no right answer to this question. It’s different for everybody. And the answer may change as your child gets older and starts to zero in on who they are and what they’d like to do in the future.
Personally, I’m taking a balanced approach to this.
Just like I hedge my stock investments and my future tax liabilities — because I can’t predict the future on stock returns or tax laws — I think it’s prudent to hedge the amount of college savings we accumulate.
Outside of getting a good job, I believe there’s still a tremendous amount of value in the traditional college experience. I want to be sure my kids can truly enjoy that experience.
But I also know that my kids are not me. And they may not want that experience. I want to have enough money saved up to help them in either scenario.
Currently, the average cost of tuition + room and board — for a Texas public university — is $18,325. You can find the cost for your state here.
In 10 years (when my son is approaching college age), if we assume a normal inflation rate of 3%, that would be $24,627 per year. In 15 years (when my daughter is approaching college age), it would be $28,549 per year.
Using basic math, a four-year degree would cost $98,508 for my son and $114,196 for my daughter. Yes, I realize that the cost can inflate each year they are in college, but I’m not going to stress myself out over an exact estimate, when we actually have no idea what the cost will be.
I’m comfortable if we have this amount 50% funded. I don’t want to overfund in case costs come down a lot. I also don’t want to overfund in case my kids decide not to go to traditional college.
And I want to ensure that any savings that are not used for college can be applied elsewhere without paying extra taxes or penalties.
What type of college savings account should you use?
Here in the United States, the traditional college savings plan is a 529 account.
These accounts, in my opinion, are the best accounts to save for college, thanks to the tax benefits. Your money grows tax-free. And the entire account balance can be withdrawn tax-free if the funds are used for approved college costs.
Also, depending on which state you live in, your contributions to these accounts are tax-deductible at the state level. Which can be great in high-tax states. The notable exception is California, which does not allow tax-deductibility on 529 contributions.
And while any non-college withdrawals are penalized, the US government now allows unused funds to be rolled over into a Roth IRA in your child’s name.
Starting a Roth IRA in your child’s name as they start their career is a great way to give them the gift of future financial security.
Let’s say you overfunded the 529 by $20,000. A $20,000 Roth IRA balance at age 24 would potentially grow all the way to $618,253 by the time they reach 60 (assuming historical stock market returns).
In my opinion, a mixture of a 529 plan and a non-retirement brokerage account (in the parent’s name) is generally a good way to go.
The reasons I like a brokerage account in the parent’s name are flexibility and financial aid. These assets can be used for anything, any time. And since they’re in the parent’s name, they will have a more limited impact on the amount of financial aid your child is eligible for.
The money can be used to supplement college costs, in the event we have any shortfall in 529 savings. And if we don’t have a shortfall, we can use the funds for whatever we want.