Are You Saving Too Much for Your Childrens’ Education?

As a Certified Financial Planner™ focused on helping new parents and young families, the most common question I’m asked is, “What is the best investment vehicle to use to save for our child’s college education?” My answer may stun you: Maybe you shouldn’t be putting anything away for college just yet.

I certainly understand why saving for college is a top concern for many parents of young children. Depending on the age of your child and whether they choose to pursue a public or private secondary education, the total cost will likely surpass $250,000 and if your infant is in the class of 2032 at a top private university, the bill will almost certainly exceed a half million dollars! That means to fund your child’s college education fully, you may need to save nearly $1,000 each every month from birth through high school graduation, and even more if you start later or your investment returns don’t meet your expectations. If you spent your 20s and some of your 30s paying off your own student loans, you may feel strongly about helping your children avoid that financial burden.

Facing these staggering sums, it’s no wonder that many new parents are fixated on jump starting their children’s education fund as soon as possible. But first, be sure to step back and take a look at your bigger financial picture. If you are the parent of a baby or about to become one, you’ll face substantial financial needs in the near term and in the very long term. Adding a new member to your family will result in increased costs of living, and if one parent elects to stop working or if you require childcare, your monthly budget equation is going to change dramatically. If you are reducing your monthly income or increasing your monthly expenses by thousands of dollars each month to spend more time with your young child (which can certainly be a wonderful choice!), what financial changes will you need to make?

In the long term, we will all need to accumulate substantial savings to carry us through our retirement years. The volatile financial markets have helped to reinforce the need to save for retirement systematically and why it is unwise to count on ongoing outsized investment returns (as well as an unending streak of historically low inflation.) With increasingly longer life spans, the disappearance of traditional defined benefit pension plans and the long term solvency concerns of Social Security, it is up to all of us to provide for our own retirement. If you‘re unable to do so, you may find yourself turning to your children to support you later in life!

So, with the increased financial strain that comes with a new addition to the family as well as the tremendous amount that you should strive to save for retirement, where do college savings come in to play? Look first at what I call the bookends: Your Current Savings/Emergency Fund (6 months of expenses) and the sum of your total Retirement Portfolio (all IRAs, 401(k)s, 403(b)). With these two “ends” in place and strong, you can hold up the books in between. The books represent any of your other financial goals. If you feel that providing your child with a completely paid for education is a vital thing for you to do as a parent, then College Savings may be the first book on the shelf.

Kristin Harad is a Certified Financial Planner with VitaVie Financial Planning in San Francisco.

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