Many of the personal finance sites I read concentrate on a few key areas: reducing debt, making investments, emergency funds, saving for your children’s college education and saving for retirement. I agree that most of these are important topics, but I don’t believe that you should save for your children’s college education. This may come across as a shocking or neglectful thing for a parent to say, but I have my reasons.
Save for your retirement and debt reduction first. Quite simply, there is a good chance that any 529 or savings plan you start today will not have a better return than debt reduction or your own retirement savings. You may argue that a 529 and a 401(k), for example, have a similar pre-tax benefit, but if your 401(k) has an employer match it’s going to come out ahead of a 529. Now, if you have an employer who will match 529 contributions, then it’s probably a good idea (and hold on to that job like grim death because I bet it offers very good benefits in general). But I doubt your 529 will return 15% if your IRA is returning 3%; most likely they’ll both be in the ballpark of the market in general, assuming you have similar funds in each.
Just remember that if you are a burden on your children when you retire, due to debt or lack of savings, much of the money you saved for their education may be lost. You may unconsciously think of putting money into your child’s education as a retirement plan (“my son the rich doctor will buy me a house in Arizona when I’m old!”) but that’s putting a huge amount of faith in a future unknown. What if your child decides instead to work as a doctor for “Medicin Sans Frontieres” or has eight children of their own (i.e. no money leftover)? Or, more brutally, decides that he or she want a vacation home in California and decide to leave Mother and Father in the one-bedroom in Funkytown? I hope that my son will spend his money on himself and his family rather than needing to help me out. I hope that if I really need help, he’ll be there, but more in the sense of physical or emotional or ‘administrative’ help when I’m too old to manage for myself. And it takes a lot of money to pay for the golden years.
Finally, I think it goes without saying that if you’re paying 18% on credit card debt but skimping on debt repayment to fund a 529, and your 529 returns are 10% per year (even considering the tax advantages) it’s probably better to pay the debt down first, then worry about your children’s education.
Student loans/scholarships. Quite simply, nobody is going to give you a loan or a gift to fund your retirement. On the other hand, student loans are easy to come by and scholarships, while not always easy to come by, are plentiful. I was no great athlete, but I received tennis scholarships. I also received a number of academic scholarships. Some were general, but others were award-related (National Merit Finalist scholarship, for example). If your child studies hard and participates in extracurriculars, they will receive scholarships. They may not receive scholarships to every school they want to attend, but I guarantee there will be a college willing to extend “free money” in the form of a scholarship to attract students with good grades or community leadership activities or athletic ability.
…to be continued…