Have you ever broken up with someone?
Have you tried to break up with someone who didn’t want to be broken up with? No matter how hard you tried to guide the conversation—and the relationship—to a conclusion, the other person routed you back to the beginning. That’s how I felt when I interviewed Tim Higgins, author of “Pay for College Without Sacrificing Your Retirement: A Guide to Your Financial Future.”
I’m not saying that Tim needs to be dumped. He seems like a perfectly nice fellow. What I am saying is that Tim broke my heart. I wanted to talk 529 College Savings Plans, which we eventually did, but first Tim hit me with three things parents should do before they even think about college savings.
I was a little disappointed. Okay, I was very disappointed. But since I don’t want to spend my golden years reading “72 Ways to Prepare ALPO and Love It,” it makes sense to take a big picture view of college savings.
Here are three things you must do before you save a penny for kids’ college:
No. 1 Run a retirement analysis
“That’s going to give insight into whether we should be saving for college at all,” says Tim.
At this point, you’re probably thinking college savings is scary enough, now we have to talk about retirement, too. Don’t despair, prepare.
Get a basic picture of your retirement outlook with MSN’s Retirement Calculator. You’ll need to provide your income, annual savings, and other info. The results are only as accurate as you are. Fight the temptation to fudge on how much you save and don’t inflate your expected rate of return—put me down for 40%.
The calculator will estimate how long your savings will last in retirement. It will also suggest how much you should save to meet your retirement goals. If you’re satisfied with your retirement picture, you might be ready to start saving for college. If you’re not happy, or haven’t started saving for retirement, you might want to put college savings on the back burner for a while.
While we’re on the topic of retirement, don’t sleep on any matching programs offered by your employer.
“If your employer offers a matching contribution in your 401k or 403b, that’s the number one thing you should be doing,” says Tim. “That’s a 100% return. I don’t care about state universities or private universities. That topic is off the table until you save into that account.”
No. 2 Run a cash flow analysis
What is cash flow? Cash flow is the movement of money into and out of a business—in this case, the income and expenses of your household. A cash flow analysis will help you answer two questions:
- Do I currently have extra money to save towards college?
- Will I be able to pay tuition out of cash flow in the future?
To run a cash flow analysis, you’ll need your monthly income and expenses. The expenses should include everything from mortgage and car payments to entertainment and clothing costs.
Plug your numbers into a cash flow calculator like the one on Yahoo! Finance. The results may show that you have a positive cash flow, meaning there’s money left after expenses. That’s cash that could go into your child’s college fund. On the other hand, the cash flow calculator may show that your household finances are in the red.
No. 3 Take a sober look at your own debt
I talk to a lot of parents about saving for college. I often hear, “I can’t save for my child’s college education. I’m still paying back my own student loans.” That’s a generational curse if I’ve ever heard of one.
It’s wise to consider your own debt first. While it might be emotionally satisfying to invest in a college fund, it makes no sense to chase after 6% in a college savings account, while your own student loans and high-interest credit cards have you trapped.
Check out Dave Ramsey’s “7 Baby Steps” for debt help. I’m a Dave Ramsey fan, plus I think there’s a federal law that you can’t discuss debt without mentioning Dave. And I’m a law-abiding citizen.
There you have it folks, three things you should do before you start saving for college. Your retirement account and your tummy (sans the ALPO) will thank you.
Readers: What are your questions/thoughts about college savings and retirement? Ever had trouble breaking up with someone (yep, I’m being nosy)?
Tim Higgins is a certified college planning specialist who has appeared in SmartMoney Magazine and Entrepreneur Magazine, among others. Visit Tim’s website for more information on how to pay for college without sacrificing your retirement.
Just the facts, Jack: This is NOT a sponsored post. This post contains Amazon affiliate links.