February 28, 2012

How to Save for Your Children’s Education in a Down Economy

By Pamela J. Sams, CRPC

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During the Great Recession of 2008, many investment accounts and savings of millions of people nationwide were destroyed. Their retirement funding, education savings, home equity and rainy day funds disappeared virtually overnight. But, even with market instability, unemployment woes, mortgage problems and a host of other major economic issues, parents still want and need to consider their children’s future. It is possible to continue putting money away every month and there are specific steps that families can take to assure their children have money for college, but it takes focus and determination.

Smart Budgeting

The initial step in saving for your children’s education is the calculation of how much you spend, creating a monthly budget and adhering to it diligently. Free and low cost budget programs exist on the Internet at places like Mint.com. There are budgeting apps for smart phones such as BillTracker and numerous others. You can budget the old fashion way and use an Excel spreadsheet or a pen and paper. Save all your receipts, collect all your bills and keep careful track of everything for 2-4 months so you get a good average monthly expense chart. Have three different sections of your budget: standard expenses like car payment, mortgage, insurance and other costs that don’t change; adjustable expenses such as utility bills, food, gasoline and those that alter each month; and emergency funds for unexpected health or other problems. Figure out where you can cut costs, try for a minimum of 10 to 15 percent and then put that money into savings until you are ready to start investing it.

Your Expected Time Horizon

Figure out when you will need the money and for how long. Keep realistic goals; if you decide you need $80,000 for your oldest child to go to college in three years then you will most likely end up disappointed. Use an investment calculator to decide how much you need to save every month at various interest rates to reach your goals. If you are not comfortable with doing the calculations yourself then hire a financial advisor; they have the knowledge and skills to help you reach your goals. According to the investment calculator at Bankrate.com, an initial investment of $5000, with an annual investment of $2000 for 15 years at a four percent return will add a total of $47,866 to your children’s college fund (Bankrate, 2011). You may be able to add an extra $2000 per year (a total of $166 per month, or $5.50 per day) by reducing your expenses: take a lunch to work, stop buying a latte on the way to work, carpool and you can easily put aside that much money.

Pay Off High Interest Debts

Making minimum monthly payments on your credit cards or other high interest credit accounts seems easy, but consider the amount of money you would save if you weren’t paying so much interest. A $3000 balance with a 17% APR equals a total of $510 in interest per year and that doesn’t count all the extra fees that credit card companies charge. Get your credit cards paid off first and use the extra money you save to add to your children’s education fund. Pay double or even triple payments if necessary. A $2500 credit card debt at 14% APR with $9 is monthly fees will cost you $234 per month to pay off in one year; you save $194 in interest costs immediately (Credit Cards, 2011).

Open an Education Savings Account (ESA)

The cost of higher education in the United States keeps rising every year. The 2010-11 Trends in Higher Education Report by collegetrends.org states that from 2000 to 2011 the costs of higher education increased at an average rate of 5.6% per year over the inflation rate, or an approximate increase in all tuition and fees of 22% to 28%. That equates to a total average cost of in-state expenses (including tuition, fees, room and board) of $16,140 per year and out-of-state costs at $28,130 per year for public institutions; private colleges are considerably more (College Board, 2010). These costs will continue to rise and one investment to help your children meet the costs of their college education is investing in an ESA:

1.Coverdell ESA: Families whose modified gross adjusted income is less than $110,000 ($220,000 if joint filing) can setup a Coverdell ESA for their children. The plan allows a maximum deposit of $2000 per year into the account and only one account can be started per child, so all family members must deposit money into the same account. The money is tax free, so it is taken off your gross income. Your children do not have to pay any taxes on it as long as the money is used for qualified education expenses including: primary school, secondary school and higher education. The contributions are not tax deductible though (IRS, 2011).

2.529 Education Plan: 529 plans are state-controlled pre-paid tuition funds that work in similar ways to standard mutual funds, but can only be used for higher education expenses. Unlike Coverdell ESA, the 529 plans do not have a maximum income requirement, so are an option for those families whose income exceeds the maximum for most other plans. Every state sets the maximum contribution amount per year allowable into the account, with some states as high as $300,000 per year. The contributions are not tax deductible and any contribution over $13,000 ($26,000 for a couple) is not tax free – similar to Federal Gift amount laws (SEC, 2011).

Talk to your financial advisor about starting a Coverdell ESA or 529 Education Plan, get your monthly expenses down and start saving for your children’s future now. Any amount you can put away will help when your kids reach the age when they need the financial help to go to college.

Resources
Bankrate (2011). Return on Investment Calculator. Retrieved from bankrate.com/calculators/retirement/roi-calculator.aspx
College Board (2010). Trends in Higher Education Series: Highlights. Retrieved from trends.collegeboard.org/downloads/college_pricing/highlights.pdf
Credit Cards (2011). What will it take to pay off my current balance? Retrieved from creditcards.com/calculators/payoff.php
Internal Revenue Service (2011). Coverdell Education Savings Account (ESA). Retrieved from irs.gov/publications/p970/ch07.html
Securities and Exchange Commission (2007). An Introduction to 529 Plans. Retrieved from sec.gov/investor/pubs/intro529.htm

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About Pamela J. Sams, CRPC

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has been helping women and their families improve
their personal and financial wealth through good
financial planning for the past 11 years. She is a Financial Advisor with Financial Planning Services of Northern Virginia with an office located in
Herndon. She is an investment advisor representative and offers securities and advisory services through ING Financial Partners, Inc. Financial Planning Services is not a subsidiary
of , nor controlled by ING Financial Partners. You may contact Pamela at 703-234-7918, online at www.
pamelasams.com or by email: Pamela@
MakingMoneySense.com. Please note that neither ING Financial Partners nor any of its agents or representatives give legal or tax advice. For complete details, consult with your tax advisor or attorney.

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