Baby Step Five – College Savings
April 6, 2010 by: Dave Ozment
Welcome back to my continuing break down of Dave Ramsey’s Baby Steps. These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.
I personally find these steps simple and easy to follow but also elegant and effective.
In previous installments I covered:
Baby Step 1 – $1000 Emergency Fund
Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball
Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses
Baby Step 4 – 15% Earnings Invested for Retirement
Today, we’ll examine Baby Step Five.
Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)
This may be my favorite single step. Not because I don’t want to experience the benefits accrued to the other steps – they are all winners – but rather because of what it represents.
I’ll explore this step by elaborating on what this step represents to me.
- Assumed Affluence – face it, if you’re writing checks to send your child to college then you’re doing something right. You may not be swimming in money, but you’re surely not bouncing checks and worrying about the mortgage each month. Something may be keeping you up at night, but if you’re taken care of business on this front then it likely is not your cash flow position. Bear in mind, I’m not saying affluence to suggest flash. Rather, this is an attained position of financial comfort.
- Love, Sweet Love – who wouldn’t want a couple extra hundred dollars in their budget each month? That may represent a couple nice nights out with the spouse or access to the latest high tech gadget or (for many) an enhanced car payment. Or, it could be quietly tucked away in an act of sustained selfless discipline and devotion aimed at your child.
- Shoulders of Others – there’s a certain truth in the idea that each generation wants their children to achieve more than they did. I know that my father loves me in the way he is so genuinely proud of the success and opportunity I’ve had in my life and career. Through the years he has made sacrifices to help me along my way. As a living tribute to his example, and with the hope that my child will one day see my love echoed back onto them, I want to shoulder as much of their educational costs as possible.
The tools for executing against this objective or step are varied and I’ll supply a handful of links to help inform your (and my) research. However, the mechanics are less the point for this Step – at least in my mind.
Resource Links:
Comparison of College Savings Plans
What is an Educational Savings Account (ESA)?
Whereas the previous steps have progressively influenced the relative comfort of your situation, In Step 5 you can begin to redirect the future path of your children. Imagine them embarking on adulthood with no debt. For so many of us, that’s the starting point we’re still struggling to achieve oh these many years later. That’s why I want to advance my child’s starting point as far as possible.
That simply is worthwhile.
Stay tuned for upcoming installments in this series:
Baby Step 6 – Pay-Off the House
Baby Step 7 – Save, Invest, and Get Rich
Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well. While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.
Read, Enjoy, Comment, Subscribe!
Photo By: fabio funkyb
Great post, I am a father of a 3yr old and saving for college now is a high priority – I don’t want college to sneak up on me. By the way, great redefine on Affluence: “this is an attained position of financial comfort.”
Keep up the great work!
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When you commit money somewhere, you almost always have to make a sacrifice somewhere else…it’s super important to have financial priorities to guide these kinds of decisions.
Jersey Mom & Ronnie, Let me expand…
I believe the advisor’s intent was that you could save for college using an alternative investment vehicle that is not the first thing tapped by colleges (like a 529). Retirement is one example (although probably not a good one unless there is a penalty free way to extract funds). Another example was contributing more to life insurance.
I’m curious what really is a good investment vehicle for this purpose? At any rate, I believe the advisor’s intent was not to take money away from what was already set aside for your retirement, but instead add say, 10% more to retirement than you had already planned (or another savings vehicle), and have just that 10% available to withdraw as necessary to supplement financial aid for tuition.
I’m still trying to learn myself whether something like this is a reasonable option and what the optimal financial strategy to save for college.
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You know, I’d rather my child be denied or receive a reduced amount of financial aid than take money out of retirement to pay. If my kid gets a scholarship and we have to front the rest, I am A-OK with that
.
I do agree that there is value in keeping funds separate when using them to pursue diverse objectives. If I’m doing right in savings, I should not be overly concerned about loans.
Thanks for commenting.
Dave
Dave- This topic is of particular interest to me because I’ll be a new father in just two short months…..or sooner, she’s really trying to get out early!
I’d like to contribute to my child’s education as much as possible and I know it will be difficult if tuitiion keeps increasing at the pace it has been. Can you imagine having to dole out something like 60k per year in 18 years?
Anyway, I recently heard some contrarian advice from a friend who hired an educational financial planning advisor. He said that the advisor suggested that the use of 529’s could actually hurt his ability to apply for financial aid (loans, grants, etc). When you go to apply, the college knows that money is set aside for education and will expect all of it to be used first. On the other hand, if you had that money socked away in a retirement vehicle you could potentially get a better financial aid package, and then contribute what you want out of your own money to supplement that.
I know it’s a different approach and may spark some debate, but was curious if you or any of your readers had any thoughts about this.
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Hey Geoff and congrats!
This is a topic I’ll be learning more and more about in the coming weeks, months, and years. Our first is due in September.
I liked your write-up on 100 Goals. I need to check out your site.
Thanks for commenting!
Dave
Hey Dave, I want to drop you a line (off-line) but your “mailbox quota is exceeded”. Can you shoot me an email with an alternative contact method? I was hoping you would allow me to pick your brain on a few things. I promise it won’t hurt
.
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Personally, I would not put money allocated to college tuition in retirement accts. I have a separate investment account (on top of 529 plans) set up for my kids’ college tuition. I have heard about what you mentioned – colleges may not give financial aid to people who have money set aside but do you really want to take the risk of not having money for the kids to go to college? It is a personal decision of course. I’d rather put money away and allow my kids the choice of attending any college they choose in the future.
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I firmly believe in saving for my children’s college tuition. In fact, we already have enough set aside if they want to attend state universities. We’re still saving just in case they want to go to private universities or grad schools, which we all know costs a lot more.
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